What is Amortization?
Firstly, Amortization means paying off debt with regular payments, carried out over time. The fixed payments, covers both the principal as well as the interest on the account, while the interest charges become smaller and smaller over the payment schedule.
What is an Amortization Table?
Interestingly, an amortization table is one that lists each monthly payment in a loan and how much of each payment goes to interest as well as how much to the principal. Also, understand that, every amortization table, contains the same kind of information. Let’s see them:
This is your required monthly payments which are listed individually by month for the length of the loan.
Secondly, the principal payment is the remainder of your payment that goes towards paying off your debt after you apply the interest charges.
Also, out of each payment, a portion of it is directed toward interest, which is calculated as you multiply your loan balance by your monthly interest rate.
Even though your total payment stays equal for each period, you will be paying off the loan’s interest and principal in different amounts each month. When the loan is just starting out, interest costs are at their highest, and as time goes on, more and more of each payment goes towards your principal, and you pay proportionately less in interest each month.
Difference Between Amortization and Depreciation
Amortization as earlier mentioned is a custom of spreading an intangible asset’s cost over that asset’s useful life. Understand that intangible assets are not physical assets, and examples of intangible assets that are expensed via amortization may include:
- Cost of issuing bonds in order to raise capital.
- Organizational costs
- Franchise agreement
- Patents and trademarks
- Proprietary processes, like copyrights
Amortization is typically expensed on a straight-line basis, which implies that the same amount is expensed in each period over the asset’s useful life. Also, assets that are expensed using the amortization method do not have any resale or salvage value.
Understand also that the term comes into play in both accounting and in lending with completely different definitions as well as uses.
This is defined as the expensing of a fixed asset over its useful life. Fixed assets are assets, which implies that they are physical assets that can be touched. Here are some examples of such assets which are:
- Office furniture
However, assets might have some. Value at the end of their life, thus depreciation is calculated by. Subtracting the asset’s salvage value or resale value from its original cost. The difference gets depreciated evenly over the years of the expected life of the asset.
Depreciation of some fixed assets can be carried out. On an accelerated basis, which implies that a larger portion of. The asset’s value is expensed in the early years of the asset’s life.