Amortized

Amortized refers to the process of gradually writing off the cost of an asset or loan over a specific period. It involves spreading the expense or debt payments over time, typically through regular installments. In accounting, it is used to allocate the cost of intangible assets like patents or goodwill. In finance, it describes how principal and interest payments are made on loans, like mortgages. The purpose of amortization is to reflect the consumption of an asset's value or to pay off a debt systematically. It considers the time value of money, ensuring consistent allocation of expenses or debt reduction.

Amortized meaning with examples

• The company amortized the cost of the new software system over five years, allowing them to spread the expense across several accounting periods. This helped stabilize their reported earnings and better reflect the long-term benefit of the software investment. This approach contrasted sharply with the practice of charging the whole expense to the first year.
• When securing a home loan, the bank provides a detailed amortization schedule, illustrating how each monthly payment is allocated between principal and interest, and showing the remaining loan balance. The homeowners understood this schedule and followed their plan to pay down their mortgage in a timely fashion and understand the total amount paid.
• The corporation amortized the value of their intellectual property, which included trademarks and copyrights, across their useful lifespan of 20 years. By periodically writing down the value, it provided a clearer picture of their financial position and allowed them to expense the purchase without a major impact on their bottom line.
• Small business owners amortized the cost of equipment financing over 36 months, facilitating manageable monthly payments. They needed to manage their working capital, but also needed some special equipment that would prove fruitful for their business in the long run, thus requiring amortization.