Bookkeeping What is Amortization: Definition, Formula, Examples

What is Amortization: Definition, Formula, Examples

However, you can calculate minimum payments by hand using just the loan amount, interest rate and loan term. The amortization concept is also used in lending, where an amortization schedule itemizes the beginning balance of a loan, less the interest and principal due for payment in each period, and the ending loan balance. This schedule is quite useful for properly recording the interest and principal components of a loan payment. Unlike intangible assets, tangible assets might have some value when the business no longer has a use for them. For this reason, depreciation is calculated by subtracting the asset’s salvage value or resale value from its original cost. The difference is depreciated evenly over the years of the expected life of the asset.

  • Consider the following examples to better understand the calculation of amortization through the formula shown in the previous section.
  • The amortization period is defined as the total time taken by you to repay the loan in full.
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  • The second situation, amortization may refer to the debt by regular main and interest payments over time.

Calculation of amortization is a lot easier when you know what the monthly loan amount is. With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support. An asset becomes collateral when it’s pledged as security against credit exposure. For a borrower, getting an amortizing loan may allow them to make a purchase or an investment for which they currently lack sufficient funds.


This is often because intangible assets do not have a salvage, while physical goods (i.e. old cars can be sold for scrap, outdated buildings can still be occupied) may have residual value. By definition, depreciation is only applicable to physical, tangible assets subject to having their costs allocated over their useful lives. The IRS has schedules that dictate the total number of years in which to expense tangible and intangible assets for tax purposes.

  • When these intangible assets get consumed completely or are eliminated, then their accumulated amortization amount is also deleted from the balance sheet.
  • A higher percentage of the flat monthly payment goes toward interest early in the loan, but with each subsequent payment, a greater percentage of it goes toward the loan’s principal.
  • The term amortization can also refer to the completion of that process, as in “the amortization of the tower was expected in 1734”.

Some examples of fixed or tangible assets that are commonly depreciated include buildings, equipment, office furniture, vehicles, and machinery. The main drawback of amortized loans is that relatively little principal is paid off in the early stages of the loan, with most of each payment going toward interest. This means that for a mortgage, for example, very little equity is being built up early on, which is unhelpful if you want to sell a home after just a few years. Repayment of large sums of payments towards a loan can also set your personal and financial objectives back for years.

Auto Loan Amortization Table

A write-off schedule is employed to reduce an existing loan balance through installment payments, for example, a mortgage or a car loan. With the information laid out in an amortization table, it’s easy to evaluate different loan options. You can compare lenders, choose between a 15- or 30-year loan, or decide whether to refinance an existing loan. With most loans, you’ll get to skip all of the remaining interest charges if you pay them off early.


Depending on the asset and materiality, the credit side of the amortization entry may go directly to to the intangible asset account. On the other hand, depreciation entries always post to accumulated depreciation, a contra account that reduces the carrying value of capital assets. Amortization schedules can be customized based on your loan and your personal circumstances.

Free Amortization Work Sheet

The table calculates how much of each monthly payment goes to the principal and interest based on the total loan amount, interest rate and loan term. You can build your own amortization table, but the simplest way to amortize a loan is to start with a template that automates all of the relevant calculations. Lenders use amortization tables to calculate monthly payments and summarize loan repayment details for borrowers. However, amortization tables also enable borrowers to determine how much debt they can afford, evaluate how much they can save by making additional payments and calculate total annual interest for tax purposes. Almost all intangible assets are amortized over their useful life using the straight-line method. This means the same amount of amortization expense is recognized each year.

Use of Contra Account

For corporate borrowers, the principal portion of a blended loan payment appears as a reduction to the loan liability account on the borrower’s balance sheet and as a use of cash on its statement of cash flows. In the course of a business, you may need to calculate amortization on intangible assets. In that case, you may use a formula similar to that of straight-line depreciation. An example of an intangible asset is when you buy a copyright for an artwork or a patent for an invention. Methodologies for allocating amortization to each accounting period are generally the same as these for depreciation.

Origin of amortization

The table below is known as an “amortization table” (or “amortization schedule”). It demonstrates how each payment affects the loan, how much you pay in interest, and how much you owe on the loan at any given time. This is a $20,000 five-year loan charging 5% interest (with monthly payments).

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