In accounting we use the word amortization to mean the systematic allocation of a balance sheet item to expense (or revenue) on the income statement. Conceptually, amortization is similar to depreciation and depletion. An example of amortization is the systematic allocation of the balance in the contra-liability account Discount of Bonds Payable to Interest Expense over the life of the bonds. (The accountant credits Discount on Bonds Payable and debits Bond Interest Expense with a portion of the balance each accounting period.) In the case of a premium on bonds payable, the accountant systematically moves a portion of the balance in Premium on Bonds Payable by debiting the account and crediting Interest Expense.
Amortization also applies to asset balances, such as discount on notes receivable, deferred charges, and some intangible assets.
Amortization is a term used with mortgage loans. For example, a mortgage lender often provides the borrower with a loan amortization schedule. This schedule lists each loan payment during the life of the loan, the amount of each payment that is for interest, the amount of each payment that is for principal, and the principal balance after each loan payment. The loan amortization schedule allows the borrower to see how the loan balance will be reduced over the life of the loan.
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