Definition: Amortization is an accounting technique used to periodically lower the book value of a loan or an intangible asset over a set period of time. Concerning a loan, amortization focuses on spreading out loan payments over time. When applied to an intangible asset, amortization is similar to depreciation.

In Plain English: Amortization typically refers to the process of writing down the value of either a loan or an intangible asset.

Example: If you take out a loan to start your shoe business the lender will create an amortization schedule that presents a repayment schedule based on a specific maturity date.

Amortization is important because it helps businesses and investors understand and forecast their costs over time. In the context of loan repayment, amortization schedules provide clarity into what portion of a loan payment consists of interest versus principal. This can be useful for purposes such as deducting interest payments for tax purposes.

Amortizing intangible assets is important because it can reduce a business’ taxable income, and therefore its tax liability, while giving investors a better understanding of the company’s true earnings.