Amortization
The gradual write-off of an intangible asset's cost, or the scheduled repayment of a loan principal.
Amortization has two distinct meanings in finance. In accounting, it refers to spreading the cost of an intangible asset (patents, software, goodwill in some frameworks) over its useful life — the intangible equivalent of depreciation.
In lending, amortization refers to the gradual repayment of a loan principal over time through regular payments. An amortising loan (like a mortgage) has payments that include both interest and principal, with the principal portion increasing over time as interest decreases.
For accounting amortization, the straight-line method is most common. Under IFRS, intangible assets with indefinite useful lives (like certain trademarks) are not amortised but tested annually for impairment. Under US GAAP, goodwill is similarly not amortised but subject to impairment testing.
Loan amortization schedules are essential for cash flow forecasting, as they determine when and how much principal must be repaid. This directly affects runway calculations, debt covenants, and refinancing planning.