Period	Beginning Loan Balance	Payment	Interest	Principal	Ending Loan Balance
Month or period	Amount of debt owed at the start of the month of period	Amount due each month (often a fixed amount over the term of the loan)	Amount of interest included in the payment (loan balance * 1/12 of interest)	Amount of principal included in loan payment (Payment – Interest)	Amount of debt owed at the end of the month or period (Beginning Loan Balance – Principal)

• The period is the timing of each loan payment, often represented on a monthly basis. However, each row on an amortization represents a payment so if a loan is due bi-weekly or quarterly, the period will be the same. This column helps a borrower and lender understand which payments will be broken down in what ways. This may either be shown as a payment number (i.e., Payment 1, Payment 2, etc.) or a date (i.e. 1/1/2023, 2/1/2023, etc.).
• The beginning loan balance is amount of debt owed at the beginning of the period. This amount is either the original amount of the loan or the amount carried over from the prior month (last month’s ending loan balance equals this month’s beginning loan balance).
• The payment is the monthly obligation calculated above. This will often remain constant over the term of the loan. Though you usually calculate the payment amount before calculating interest and principal, payment is equal to the sum of principal and interest.
• The interest portion is the amount of the payment that gets applied as interest expense. This is often calculated as the outstanding loan balance multiplied by the interest rate attributable to this period’s portion of the rate. For example, if a payment is owed monthly, this interest rate may be calculated as 1/12 of the interest rate multiplied by the beginning balance. Always be mindful of how a lender calculates, applies, and compounds your annual percentage rate as this impacts your schedule. As the outstanding loan balance decreases over time, less interest should be charged each period.
• The principal portion is simply the left over amount of the payment. This is the total payment amount less the amount of interest expense for this period. As the outstanding loan balance decreases over time, less interest will be charged, so the value of this column should increase over time.
• The ending loan balance is the difference between the beginning loan balance and the principal portion. This represents the new debt balance owed based on the payment made for the new period.

Amortization of Intangible Assets

Amortization can also refer to the amortization of intangibles. In this case, amortization is the process of expensing the cost of an intangible asset over the projected life of the asset. It measures the consumption of the value of an intangible asset, such as goodwill, a patent, a trademark, or copyright.

Amortization is calculated in a similar manner to depreciation—which is used for tangible assets, such as equipment, buildings, vehicles, and other assets subject to physical wear and tear—and depletion, which is used for natural resources.

When businesses amortize expenses over time, they help tie the cost of using an asset to the revenues that it generates in the same accounting period, in accordance with generally accepted accounting principles (GAAP). For example, a company benefits from the use of a long-term asset over a number of years. Thus, it writes off the expense incrementally over the useful life of that asset.

The amortization of intangibles is also useful in tax planning. The Internal Revenue Service (IRS) allows taxpayers to take a deduction for certain expenses: geological and geophysical expenses incurred in oil and natural gas exploration, atmospheric pollution control facilities, bond premiums, research and development (R&D), lease acquisition, forestation and reforestation, and intangibles, such as goodwill, patents, copyrights, and trademarks.

Why Is Amortization Important?

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. It is also useful for future planning to understand what a company’s future debt balance will be in the future after a series of payments have already been made.

Amortizing intangible assets is important because it can reduce a business’s taxable income, and therefore its tax liability, while giving investors a better understanding of the company’s true earnings. Intangible assets also have a finite useful life; over time, trademarks or patents may lose their value due to obsolescence. Amortizing intangible assets is also a reflection of how a company has “used up” the benefit of these assets.

Amortization vs. Depreciation

Amortization and depreciation are similar concepts, in that both attempt to capture the cost of holding an asset over time. The main difference between them, however, is that amortization refers to intangible assets, whereas depreciation refers to tangible assets. Examples of intangible assets include trademarks and patents; tangible assets include equipment, buildings, vehicles, and other assets subject to physical wear and tear.

Another difference is the accounting treatment in which different assets are reduced on the balance sheet. Amortizing an intangible asset is performed by directly crediting (reducing) that specific asset account. Alternatively, depreciation is recorded by crediting an account called accumulated depreciation, a contra asset account. The historical cost fixed assets remains on a company’s books; however, the company also reports this contra asset amount to report a net reduced book value amount.

Last, the calculation of each can be different. This is especially true when comparing depreciation to the amortization of a loan. Intangible assets are often amortized over their useful life using the straight-line method, while fixed assets often use a much more broad set of calculation methods (i.e., declining balance method, double-declining balance method, sum-of-the-years’ digits method, or the units of production method).

Example of Amortization

Let’s look at a four-year, $30,000 auto loan at 3% interest. The monthly payment is going to be $664.03. That is arrived at as follows:

$\begin{aligned}&\$30,000 \times \Bigg ( \frac { 0.0025 \times (1.0025 \div 48) }{ 1.0025 \div 48 } – 1 \Bigg ) \\\end{aligned}$​$30,000×(1.0025÷480.0025×(1.0025÷48)​−1)​

In the first month, $75 of the $664.03 monthly payment goes to interest.

$\begin{aligned}&\$30,000 \ \text{loan balance} \times 3\% \ \text{interest rate} \div 12 \ \text{months} \\\end{aligned}$​$30,000 loan balance×3% interest rate÷12 months​

The remaining $589.03 goes toward principal.

$\begin{aligned}&\$664.03 \ \text{total monthly payment} – \$75 \ \text{interest payment} \\ \end{aligned}$​$664.03 total monthly payment−$75 interest payment​

The total payment stays the same each month, while the portion going to principal increases and the portion going to interest decreases. In the final month, only $1.66 is paid in interest, because the outstanding loan balance at that point is very minimal compared with the starting loan balance.

Loan Amortization Schedule
Period	Total Payment Due	Computed Interest Due	Principal Due	Principal Balance
				$30,000
1	$664.03	$75	$589.03	$29,410.97
2	$664.03	$73.53	$590.50	$28,820.47
3	$664.03	$72.05	$591.98	$28,228.49
4	$664.03	$70.57	$593.46	$27,635.03
5	$664.03	$69.09	$594.94	$27,040.09
6	$664.03	$67.60	$596.43	$26,443.66
7	$664.03	$66.11	$597.92	$25,845.74
8	$664.03	$64.61	$599.42	$25,246.32
9	$664.03	$63.12	$600.91	$24,645.41
10	$664.03	$61.61	$602.42	$24,042.99
11	$664.03	$60.11	$603.92	$23,439.07
12	$664.03	$58.60	$605.43	$22,833.64
13	$664.03	$57.08	$606.95	$22,226.69
14	$664.03	$55.57	$608.46	$21,618.23
15	$664.03	$54.05	$609.98	$21,008.24
16	$664.03	$52.52	$611.51	$20,396.73
17	$664.03	$50.99	$613.04	$19,783.69
18	$664.03	$49.46	$614.57	$19,169.12
19	$664.03	$47.92	$616.11	$18,553.02
20	$664.03	$46.38	$617.65	$17,935.37
21	$664.03	$44.84	$619.19	$17,316.18
22	$664.03	$43.29	$620.74	$16,695.44
23	$664.03	$41.74	$622.29	$16,073.15
24	$664.03	$40.18	$623.85	$15,449.30
25	$664.03	$38.62	$625.41	$14,823.89
26	$664.03	$37.06	$626.97	$14,196.92
27	$664.03	$35.49	$628.54	$13,568.38
28	$664.03	$33.92	$630.11	$12,938.28
29	$664.03	$32.35	$631.68	$12,306.59
30	$664.03	$30.77	$633.26	$11,673.33
31	$664.03	$29.18	$634.85	$11,038.48
32	$664.03	$27.60	$636.43	$10,402.05
33	$664.03	$26.01	$638.02	$9,764.02
34	$664.03	$24.41	$639.62	$9,124.40
35	$664.03	$22.81	$641.22	$8,483.18
36	$664.03	$21.21	$642.82	$7,840.36
37	$664.03	$19.60	$644.43	$7,195.93
38	$664.03	$17.99	$646.04	$6,549.89
39	$664.03	$16.37	$647.66	$5,902.24
40	$664.03	$14.76	$649.27	$5,252.96
41	$664.03	$13.13	$650.90	$4,602.06
42	$664.03	$11.51	$652.52	$3,949.54
43	$664.03	$9.87	$654.16	$3,295.38
44	$664.03	$8.24	$655.79	$2,639.59
45	$664.03	$6.60	$657.43	$1,982.16
46	$664.03	$4.96	$659.07	$1,323.09
47	$664.03	$3.31	$660.72	$662.36
48	$664.03	$1.66	$662.36	$0.00

Frequently Asked Questions

What Is Negative Amortization?

Negative amortization is when the size of a debt increases with each payment, even if you pay on time. This happens because the interest on the loan is greater than the amount of each payment. Negative amortization is particularly dangerous with credit cards, whose interest rates can be as high as 20% or even 30%. In order to avoid owing more money later, it is important to avoid over-borrowing and to pay your debts as quickly as possible.

What Does Amortization Mean for Intangible Assets?

Amortization measures the declining value of intangible assets, such as goodwill, trademarks, patents, and copyrights. This is calculated in a similar manner to the depreciation of tangible assets, like factories and equipment. When businesses amortize intangible assets over time, they are able to tie the cost of those assets with the revenue generated over each accounting period and deduct the costs over the lifetime of the asset.

Why Is Amortization Important in Accounting?

Amortization 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 also important because it can reduce a company’s taxable income and therefore its tax liability, while giving investors a better understanding of the company’s true earnings.

How Do You Amortize a Loan?

A loan is amortized by determining the monthly payment due over the term of the loan. Then, prepare an amortization schedule that clearly identifies what portion of each month’s payment is attributable towards interest and what portion of each month’s payment is attributable towards principal.

Since part of the payment will theoretically be applied to the outstanding principal balance, the amount of interest paid each month will decrease. Since your payment should theoretically remain the same each month, more of your payment each month will apply to principal, thereby paying down the amount you borrowed over time.

The Bottom Line

Amortization is a technique of gradually reducing an account balance over time. When amortizing loans, a gradually escalating portion of the monthly debt payment is applied to the principal. When amortizing intangible assets, amortization is similar to depreciation where a fixed percentage of an asset’s book value is reduced each month. This technique is used to reflect how the benefit of an asset is received by a company over time.