Definition
In accounting, amortization applies to intangible assets (patents, copyrights, software) the same way depreciation applies to tangible assets. In lending, amortization refers to the scheduled reduction of loan principal through periodic payments. Both reduce book values over time and appear as non-cash expenses on the income statement.
lightbulb Example
A company acquires a patent for $5M with a 10-year useful life. Annual amortization = $500K. In lending, a $200K mortgage with 30-year amortization makes monthly payments of $1,061, with early payments mostly covering interest and later payments mostly reducing principal.
verified_user Key Points
- Applies to intangible assets (patents, software, goodwill)
- Lending context: gradual loan principal reduction
- Non-cash expense like depreciation
- Part of D&A added back in EBITDA