Amortisation is used for two calculations in finance:
1 In spreading the repayment of a loan: This process of breaking the debt over a period of time through monthly installments is known as amortization. The loan payment is broken into an ‘amortization schedule’ to give a series of payments which consists of principal and interest in each payment, where the installment amount remains the same during the payment period.
2 To spread the cost of a company’s ‘Intangible Assets’: It is the process of spreading, expensing or accounting of ‘Intangible Assets’ over a certain period. (Intangible assets are assets without physical existence, like patents, trademarks, copyrights, goodwill etc) Amortization is done on a straight-line basis or spreading the intangibles at the same amount over the said period. These assets don’t have any resale or scrap value.
