Amortization, What Is It?
Amortization actually has different meanings depending on what it is being related to. Amortization is chiefly used in loan repayments, such as a mortgage loan, and in sinking funds. In this situation, amortization is the distribution of a single lump-sum cash flow into many smaller cash flow installments, as determined by an amortization schedule. Unlike other repayment models, each repayment installment consists of both principal and interest. Payments are divided into equal amounts for the length of the loan, making it the simplest repayment model. A greater amount of the payment is applied to interest at the beginning of the amortization schedule, while more money is applied to principal at the end. The exact amount applied to principal each time varies and the remainder of the payment goes to interest. An amortization schedule reveals the specific dollar amount put towards interest, as well as the specific dollar amount put towards the Principal balance with each payment. When we speak in terms of accounting, amortization refers to expensing the purchase cost minus the remaining value of the intangible assets (such as patents and trademarks or copyrights and other intellectual property) in a systematic manner over their estimated useful economic lives so as to reflect their consumption, expiration, obsolescence or other decline in value as a result of use or the passage of time. Depreciation, not amortization, is used for tangible assets .Although; depreciation and amortization are not so different from each other. As a matter of fact, the way we allocate amortization to each accounting period is basically the same as it is for depreciation. However, many intangible assets such as goodwill or certain brands may be considered to have an indefinite useful life and are therefore not subject to amortization. Amortization is recorded in the financial statements of an entity as a reduction in the carrying value of the...
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