balance sheet

Depreciation is the expensing of a fixed asset over its useful life. Some examples of fixed or tangible assets that are commonly depreciated include buildings, equipment, office furniture, vehicles, and machinery. The total payment stays the same each month, while the portion going to principal increases and the portion going to interest decreases.

In the first month, $75 of the $664.03 monthly payment goes to interest. Most accounting and spreadsheet software have functions that can calculate amortization automatically. Negative amortization may happen when the payments of a loan are lower than the accumulated interest, causing the borrower to owe more money instead of less. Janet Berry-Johnson is a CPA with 10 years of experience in public accounting and writes about income taxes and small business accounting. When Chart of Accounts Mapping is used, the account source for mapping expense amortization transactions may be either the item or the transaction form. For more information, see Revenue Recognition and Expense Amortization with Chart of Accounts Mapping. You can create different templates to comply with different country and industry-specific rules.

Amortization journal entry

A part of the payment covers the interest due on the loan, and the remainder of the payment goes toward reducing the principal amount owed. Interest is computed on the current amount owed and thus will become progressively smaller as the principal decreases. BlackLine and our ecosystem of software and cloud partners work together to transform our joint customers’ finance and accounting processes.


BlackLine’s glossary provides descriptions for industry words and phrases, answers to frequently asked questions, and links to additional resources. Improve the prioritization of customer calls, reduce days sales outstanding, and watch productivity rise with more dynamic, accurate, and smarter collection management processes. Understand customer data and performance behaviors to minimize the risk of bad debt and the impact of late payments. Monitor changes in real time to identify and analyze customer risk signals. Transform your order-to-cash cycle and speed up your cash application process by instantly matching and accurately applying customer payments to customer invoices in your ERP. The credit balance in the liability account Premium on Bonds Payable will be amortized over the life of the bonds by debiting Premium on Bonds Payable and crediting Interest Expense. The above figures are a little daunting if you look at them as is, so here is an example to demonstrate it.


Amortization is important to calculate the taxable income for a certain period. Many examples of amortization in business relate to intellectual property, such as patents and copyrights.


Amortization schedules are used by lenders, such as financial institutions, to present a loan repayment schedule based on a specific maturity date. Amortization typically refers to the process of writing down the value of either a loan or an intangible asset.

How to Calculate Amortization of Loans

Now if you add up all of the separate payments in an amortization schedule, you’ll find the total exceeds the amount borrowed. To ensure the books are balanced, the business must also record a $100,000 amortization expense for the next ten years. Generally, an intangible asset like a copyright is amortized via the straight-line method.

What is amortization in simple words?

What Is Amortization? Amortization is an accounting technique used to periodically lower the book value of a loan or an intangible asset over a set period of time. Concerning a loan, amortization focuses on spreading out loan payments over time. When applied to an asset, amortization is similar to depreciation.

For example, a often must often treat depreciation and amortization as non-cash transactions when preparing their statement of cash flow. Without this level of consideration, a company may find it more difficult to plan for capital expenditures that may require upfront capital. For example, a business may buy or build an office building, and use it for many years. The business then relocates to a newer, bigger building elsewhere. The original office building may be a bit rundown but it still has value. The cost of the building, minus its resale value, is spread out over the predicted life of the building, with a portion of the cost being expensed in each accounting year.