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The reduction of a debt incurred, for example, in the purchase of stocks or bonds, by regular payments consisting of interest and part of the principal made over a specified time period upon the expiration of which the entire debt is repaid. A mortgage is amortized when it is repaid with periodic payments over a particular term. After a certain portion of each payment is applied to the interest on the debt, any balance reduces the principal.
The allocation of the cost of an intangible asset, for example, a patent or Copyright, over its estimated useful life that is considered an expense of doing business and is used to offset the earnings of the asset by its declining value. If an intangible asset has an indefinite life, such as good will, it cannot be amortized.
Amortization is not the same as depreciation, which is the allocation of the original cost of a tangible asset computed over its anticipated useful life, based on its physical wear and tear and the passage of time. Amortization of intangible assets and depreciation of tangible assets are used for tax purposes to reduce the yearly income generated by the assets by their decreasing values so that the tax imposed upon the earnings of assets is less. Amortization differs from depletion, which is a reduction in the book value of a natural resource, such as a mineral, resulting from its conversion into a marketable product. Depletion is used for a similar tax purpose as amortization and depreciation—to reduce the yearly income generated by the asset by the expenses involved in its sale so that less tax will be due.
n. a periodic payment plan to pay a debt in which the interest and a portion of the principal is included in each payment by an established mathematical formula. Most commonly it is used on a real property loan or financing of an automobile or other purchase. By figuring the interest on the declining principal and the number of years of the loan, the monthly payments are averaged and determined. Since the main portion of the early payments is interest, the principal does not decline rapidly until the latter stages of the loan term. If the amortization leaves a principal balance at the close of the time for repayment, this final lump sum is called a "balloon" payment. (See: promissory note)
AMORTIZATION, contracts, English law. An alienation of lands or tenements in
mortmain. 2 Stat. Ed. I.
2. The reduction of the property of lands or tenements to mortmain.