Amortization is gradually allocating an asset’s purchase price to an expense throughout the asset’s anticipated useful life, moving the asset from the income statement to the income statement. It simply depicts how an intangible asset is used throughout its useful life.
An intangible asset, such as a copyright, trademark, taxi license, and patent, is not tangible. The idea also applies to delayed charges and the discount on receivable notes.
The notion of amortization is also utilized in lending, where an amortization schedule breaks down the initial balance of a loan into the principal and interest that must be paid each period, as well as the ending loan balance. The amortization schedule reveals that more payments are used early in the loan’s duration to pay off the interest. This percentage gradually decreases as the loan’s principal balance is repaid.