Amortize
- To reduce or pay off a debt with regular payments of both principal and interest over a fixed period.
- In accounting, to spread the cost of an intangible asset over its useful life.
Simple Version
Amortizing is like taking a big, scary bill and breaking it into small, easy payments that you make every month until the bill is completely gone.
Example
The company decided to amortize the cost of its new software patent over the next ten years to balance its annual expenses.
Real World
When you take out a 15 year or 30 year mortgage to buy a house, the bank provides an amortization schedule. This table shows how each monthly payment is split between paying the interest and lowering the actual amount you owe until the house is fully yours.
Synonyms
- Similar: Repay, liquidate, write off, depreciate, spread
Etymology
- Derived from the Middle English “amortisen,” which comes from the Old French “amortir.” This stems from the Vulgar Latin “admortire,” meaning “to kill” or “to deaden,” referring to the act of “killing” a debt over time.
Denotations
- In technical accounting, amortization is strictly applied to intangible assets (like copyrights or patents), whereas “depreciation” is the term used for physical assets (like machinery or vehicles).
Frequently Asked Questions
How does amortization differ from depreciation?
Amortization is the practice of spreading the cost of an intangible asset over its useful life, while depreciation refers to doing the same for physical, tangible assets.
What is an amortization schedule?
It is a detailed table showing each periodic payment on a loan, specifically detailing how much of each payment goes toward the principal balance and how much goes toward interest.
Can you amortize land?
No, land cannot be amortized or depreciated because it is considered to have an indefinite useful life and does not wear out or get used up over time.