Amortization periods 

Written by Fmi.Online Friday November 11, 2022
Amortization is a process by which the book value of a loan or an intangible asset is periodically reduced over a fixed period of time. For loans, amortization implies spreading out loan payments over some period of time. The depreciation of an asset has some similarities to amortization.

Explanation :

An amortization schedule is used to reduce the current balance on a loan. On the other hand, amortization refers to paying off debt over time with regular principal and interest payments.
Intangible assets may be amortized by spreading capital expenditures over a specific period of time, of which the useful life of the asset is usually the duration.A few examples of intangible assets are patents, company names, copyrights. </
Amortization is important because it makes it easier to understand and forecast one’s business and investment costs. Loan repayments schedules show the distribution of interest vs principal payments, which provides clarity into these terms.
Purposes such as outputting the interest payments and calculating for tax purposes should be noted. An intangible asset that is amortized can significantly reduce the amount of tax a company would owe. This means investors can better estimate how accurate a company's financial statements are going to be, which is helpful for them.
Automated amortization functions are available in many accounting and spreadsheet software packages.

Amortization vs Depreciation

Amortization and depreciation are similar concepts, but they refer to different types of assets. Amortization is for intangible assets, while depreciation refers to tangible ones. The main difference between them is that amortization will be paid out evenly over the asset's lifetime - every year you will pay 1/N of its cost - whereas with depreciation the payments aren't distributed. Tangible assets are physical things like equipment, factories, inventory, and other pieces of physical property. Intangible assets refer to patents, company names, and even copyrights.

In a nutshell :

  • Amortization is the accounting of debt and is typically used for business loans and intangible assets. It can be accounted for either on an accrual basis or through debt-equity accounting.
  • To link the asset's cost to its revenue, intangible assets are amortized from time to time.
  • Amortization schedules are forecasts for the repayment of loans over specific time periods. They are often used by financiers.
Our Courses are designed to boost your career

Launch your career with Fmi’s Learning Pathway

Choose a learning pathway that best meets your needs and ambitions. Not sure which Fmi learning pathway is right for you? Explore our CareerBuddy videos for help and advice.

Investment banking pathway
  • courses-clock60+ hours
  • courses-desktop9 courses

Investment banking offers many exciting career opportunities for students. From Financial Analysts to Investment Management, and Sales & Trading to a wide range of roles in infrastructure such as IT, Risk or Compliance. This pathway is designed to help you understand the investment banking industry, the roles investment banks are recruiting for, and most importantly, help you to develop the practical skills you need to get into the industry and your preferred role whether this be as part of a school leaver, intern or graduate program.

FMI Online Student join-student-img2 FMI Online Student
55,000+ students currently enrolled
Global markets pathway
  • courses-clock70+ hours
  • courses-desktop10 courses

Global markets provide a range of important products and services to corporates, institutions and governments worldwide from executing trades and managing risk to providing quality research content. A key business area in all investment banks, global markets offers a wide range of career paths for students to consider across all functions and at all levels from school leavers to internships through to graduate programs.

FMI Online Student join-student-img2 FMI Online Student
85,000+ students currently enrolled
Asset management pathway
  • courses-clock50+ hours
  • courses-desktop8 courses

The asset management industry is a global industry worth over 100 trillion US dollars. It plays a crucial role in managing the assets of retail and institutional investors, offering a wide range of exciting careers in doing so. If you’re looking to forge a career in asset management, our Asset management pathway is perfect for you. We help you build the skills all asset managers are looking for and explore everything you need to know about the industry and the wide range of roles available in the sector

FMI Online Student join-student-img2 FMI Online Student
100,000+ students currently enrolled