Finance & Accounting
Definition
Amortization is the gradual reduction of a debt over time through regular payments, or the accounting process of expensing intangible assets (patents, trademarks, goodwill) over their useful life. The term applies to both loan repayment and asset accounting.
In loan amortization, each payment covers both interest (calculated on the remaining balance) and principal reduction. Early payments are mostly interest; later payments are mostly principal. An amortization schedule shows each payment's split between interest and principal over the loan's life. A 30-year mortgage amortizes slowly; a 5-year business loan amortizes much faster. In accounting, intangible asset amortization works like depreciation for non-physical assets: a $1 million patent with a 10-year life generates $100,000 of annual amortization expense. Unlike depreciation (tangible assets), amortization applies to intangibles — patents, customer lists, trademarks, non-compete agreements, and goodwill from acquisitions. Goodwill is no longer amortized for GAAP purposes (it's tested for impairment instead), but is amortized for tax purposes over 15 years under Section 197.
Understanding amortization is essential for business buyers and sellers — goodwill and intangible asset amortization affects post-acquisition earnings and taxes. For debt management, reviewing your amortization schedule helps you understand true cost of capital and when refinancing makes sense. An accountant or financial advisor can model the amortization implications of major financial decisions.