Amortization

What Does Amortization Mean?

Amortization refers to the schedule created for repaying loans, covering both the principal amount and the interest. It also describes the period during which an asset generates income for a business.

Insuranceopedia Explains Amortization

When a person receives a loan, they are provided with a payment schedule that outlines the dates and amounts of each installment, from the first payment to the last. A copy of this schedule is typically given as a reminder to ensure timely payments.

Amortization also refers to the useful lifespan of a company asset. For instance, if a grocery store purchases a vending machine, the expected period during which the machine will remain functional and generate income is considered in the purchase decision.

In business accounting, an insurance policy is amortized as a prepaid asset. This is because the premium is paid upfront, but the benefits of the insurance are realized over time rather than immediately upon payment.