What is Amortization?

Amortization is the intangible-asset counterpart of depreciation, which does the same job for tangible assets like equipment and buildings. Most amortization uses the straight-line method: the original cost minus any residual value is divided by the useful life in years, and that fixed slice is expensed annually. A €50,000 software licence with a ten-year life and no residual value produces a €5,000 amortization expense each year. Some intangible assets with indefinite lives — goodwill, for example — are not amortized but tested annually for impairment instead.

The economic logic is matching: the asset helped generate revenue across several years, so its cost should be spread across those same years rather than hitting the income statement all at once. For tax purposes many jurisdictions allow amortization of certain intangibles as a deductible expense, which makes accurate tracking valuable. Amortization schedules also apply to loans — the gradual reduction of a loan balance through scheduled principal-and-interest payments — but that is a different meaning of the same word.