Definition
Amortization is the systematic allocation of the cost of an intangible asset with a finite useful life, such as a software licence, patent or customer list, over that life. The same word describes repaying a loan through scheduled instalments that cover interest and part of the principal until the balance reaches zero.
How it works
For intangibles, amortization works like straight-line depreciation: the charge is an expense and the asset's carrying amount falls. Intangibles with an indefinite life, including goodwill under IFRS, are not amortized but tested for impairment instead.
For loans, an amortization schedule splits each equal payment into interest on the outstanding balance and principal repayment. Early payments are mostly interest; later ones mostly principal. Only the interest part is an expense. Build a schedule with the loan amortization calculator.
Formula
Annual amortization = (Cost - Residual value) / Useful life
Loan payment = P × r / (1 - (1 + r)^-n)
Example: amortizing a software licence
A company buys a three-year licence for 9,000 on 1 January. It records an intangible asset of 9,000 and amortizes 3,000 a year (250 a month), debiting amortization expense and crediting accumulated amortization.