What is Amortization?

Amortization generally refers to two things: the gradual repayment of a loan over time, and the process of spreading the cost of an asset over its useful life in business accounting. Both concepts involve systematically reducing an amount over time, though they apply in different contexts.

Paying Off a Loan Over Time

When you take out a loan — whether it’s a mortgage, auto loan, or personal loan — you typically make regular monthly payments that include both principal (the original loan amount) and interest (the lender’s charge for borrowing). Over time, the interest portion of each payment decreases as the outstanding balance (principal) reduces. This gradual reduction in debt is what’s known as loan amortization.

You can visualize this process using an amortization schedule, which breaks down each payment into principal and interest portions and shows how your balance declines with every payment.

Not all loans are amortized. For example, credit cards represent revolving debt — you can carry balances from month to month and make variable payments. Similarly, interest-only loans and balloon loans aren’t fully amortized because the principal is paid off later, either partially or in a lump sum.

Amortization Schedule

An amortization schedule (also called an amortization table) provides a detailed breakdown of each loan payment. It shows:

• How much of each payment goes toward interest
• How much goes toward principal
• The remaining balance after every payment

These tables make it easy to understand how long it will take to pay off a loan and how much total interest you’ll pay. Basic schedules assume fixed-rate loans and don’t include fees or extra payments. However, adding even small extra payments toward principal can significantly reduce your total interest and shorten your loan term.

Amortization in Business Accounting

In accounting, amortization refers to spreading the cost of intangible assets — such as patents, copyrights, or trademarks — over their useful life. It helps businesses avoid recording large one-time expenses for assets that generate value over many years.

For example, a company that buys software, trademarks, or intellectual property can gradually record its cost as an expense over several years. This practice ensures financial statements more accurately reflect ongoing business performance.

Common intangible assets that are amortized include:

• Goodwill and going-concern value
• Patents, copyrights, and trademarks
• Business licenses and permits
• Customer and supplier relationships
• Non-compete agreements and franchise rights

Certain assets, such as goodwill with indefinite life or self-created intangibles, cannot be amortized for tax purposes under U.S. law.

Amortizing Startup Costs

In the United States, startup costs — expenses incurred before a business officially begins operations — may also be amortized if they qualify. These include costs for market research, employee training, consulting, and advertising conducted before the business becomes active. The IRS allows such costs to be deducted over time to ease the financial burden of launching a new venture.