Amortization refers to the process of paying off debt through scheduled, predetermined installments, including principal and interest.
Payments are in the form of principal and interest in almost all areas where depreciation applies. The usage of these terms is related to debt or loans.
Loan Amortization
It is the process of paying off the outstanding balance in full over time.
However , in most cases while offering a loan, a set of fixed payments is first established and the individual receiving the loan is responsible for satisfying each payment.
The amount of principal and interest paid on the loan varies from month to month. This amount is fixed for each payment period.
Asset
However, Amortization is different from dealing with assets, especially non-physical intangible assets such as brands, intellectual property, and trademarks.
In this setting, depreciation, like depreciation of fixed assets, is a periodic decrease in value over time.
When you buy and use fixed / tangible assets (machinery, land, buildings), their value declines over time.
So, for example, if a new company buys a forklift for $ 30,000 for use in the logging business, it will not be worth the same amount in 5 or 10 years. Still, the assets need to be accounted for on the company’s balance sheet.
when we assume a forklifts useful life of 10 years, it is depreciated at a value of $ 3,000 each year. Depreciation refers to the act of depreciation of intangible assets.
How to calculate the amount?
To calculate the amount, you need to know three basic things:
- The initial value of the asset,
- The useful life remaining on the asset, and the residual value of the asset.
Did you get those numbers? In that case, here’s how to calculate the depreciation of an asset:
- Firstly , the residual value is deducted from the reference value (paid amount).
- Secondly, divide this number by the number of months remaining in its useful life.
Interested in learning about similar topics? Here are a few hand-picked blogs for you!