What Is Amortization?
Amortization is the process of spreading the cost of an intangible asset over its useful life, or of paying down a loan's principal over time through scheduled payments. In accounting, it allocates a portion of the asset's cost to expense in each period rather than all at once.
What amortization is and why it matters
Amortization is the intangible-asset counterpart to depreciation. When a business buys something without physical form but with lasting value — a patent, software license, or trademark — the cost is recognized gradually over the years it provides benefit, matching expense to the periods that use it. The same word also describes loan amortization: the schedule by which each payment splits between interest and principal until the balance reaches zero. Both meanings share the core idea of allocating a large amount across time. Amortization is a non-cash expense, which is why it's added back in measures like EBITDA.
A worked example
A company buys a patent for $100,000 with a useful life of 10 years. Using straight-line amortization, it expenses $10,000 per year: debit *Amortization Expense* $10,000, credit *Accumulated Amortization* $10,000 annually. After three years, $30,000 has been amortized and the patent's book value is $70,000. The full $100,000 outflow happened once, but the expense is recognized $10,000 at a time.
How firms handle it today
Firms maintain an amortization schedule per intangible asset and book the periodic entry at close, mirroring how they handle depreciation schedules. The entries are formulaic once the schedule is set.
Related terms
- Depreciation
- Intangible asset
- Journal entry
- EBITDA
- Book value
FAQ
What's the difference between amortization and depreciation?
Amortization applies to intangible assets (and loans); depreciation applies to tangible fixed assets like equipment. The mechanics are otherwise similar.
Is amortization a cash expense?
No — it's a non-cash accounting entry that allocates a past cash outlay over time, which is why it's added back in EBITDA.
How is amortization calculated?
Most commonly straight-line: the asset's cost divided by its useful life, expensed evenly each period.