FinTech Glossary

Meaning

Amortization is the gradual write-off of the cost of an intangible asset or the systematic repayment of a loan over a fixed period through scheduled instalments that cover both principal and interest.

Business Context

In accounting, amortization is used for intangible assets like patents, trademarks, and software licences, similar to how depreciation applies to tangible assets, and follows Ind AS and Companies Act guidelines in India.

How It Works

For loans, each instalment in an amortization schedule is split between interest and principal repayment; early instalments carry a higher interest component, which gradually reduces as the outstanding principal shrinks. For intangible assets, the cost is spread evenly or on a usage basis over the asset's useful life.

Why It Matters for Businesses

Amortization schedules help businesses plan loan repayments, forecast interest costs, and present an accurate picture of asset value and expenses in financial statements for audits and investor reporting.