What is Amortization

Meaning of Amortization 

Amortization is the process in which we decrease the value of intangible assets like depreciation is the decrease in the value of tangible assets.

It also used in debt payments. When we amortization of debt through installment of its principal and interest, value of debt will decrease.


It is also called depreciation of intangible asset when depreciation is decrease in the tangible asset. Both depreciation and amortization will decrease the taxable income of business.


Following is the Simple formula of Amortization of Intangible Asset Per Year

For example,

You have taken house loan of Rs. 1,00,000 @ 10% rate of interest for 5 years 

A = P ( 1 - 10/100 ) ^ 5

Total amount in 5 years = Rs. 161051

Total Principal = Rs. 1,00,000

Total Interest = Rs. 61,051

Per month installment = Rs. 2684.18

Per month interest = Rs. 1017.51 

First month principal paid = Rs. 1666.67

Conclusion

Amortization will decrease the value of current loan or our intengible asset.

Amortization will done on specific date, it may be maturity date, loan installment paying date.