The process of paying off debts, such as loans, can be accounted for using a method known as amortization, which involves spreading the payments out over a predetermined amount of time. When dealing with intangible assets, this method is utilized to space out the costs associated with the assets over a longer period of time.
Lenders will employ this method to present the repayment schedule for a loan based on the date that the loan will mature. When paying back a loan, the borrower is required to make consistent payments toward both the interest and the principal balance of the loan. This is done to ensure that the debt is cleared before the loan’s maturity date.
The loan amortization formula is as follows:
This method is useful for calculating how much of an asset’s value has been depleted over the course of the asset’s anticipated useful life. The processes of depreciation and depletion serve to illustrate this. Through the process of amortization, the company reduces its overall cost by writing off the cost of expenses over the course of the useful life of intangible assets.