Amortization
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Amortization is the process of gradually writing off the cost of an intangible asset or paying down a loan over a defined period of time. It spreads the financial impact of a large cost across multiple accounting periods rather than recording it all at once.
In depth
In accounting, amortization applies to intangible assets like patents, trademarks, copyrights, and software licenses. The cost of the asset is divided evenly (or using another method) across its useful life and recorded as an expense each period. In the context of loans, amortization refers to the repayment schedule where each payment covers both interest and a portion of the principal, gradually reducing the outstanding balance to zero.
Amortization is important because it ensures expenses are matched to the periods in which the asset provides value, giving a more accurate view of profitability over time.