Amortization refers to the process of gradually reducing the value of an intangible asset or the outstanding balance of a loan over a specified period through periodic payments.
In accounting, amortization is commonly used for intangible assets, such as patents or trademarks, where the cost is spread over the asset’s useful life. For example, if a company purchases a patent for $10,000 with a useful life of 10 years, it would amortize $1,000 each year on its financial statements.
In the context of loans, amortization involves paying off the principal amount and interest over time, typically through fixed payments. For instance, a borrower may take a $100,000 mortgage loan with a 30-year term, making monthly payments that include both interest and principal until the loan is fully repaid at the end of the term.
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