Amortization

From Wikicpa

Amortization is the distribution of a single lump-sum cash flow into many smaller cash flow installments, as determined by an amortization schedule. Unlike other repayment models, each repayment installment consists of both principal and interest. Amortization is chiefly used in loan repayments (a common example being a mortgage) and in sinking funds. Payments are divided into equal amounts for the duration of the loan, making it the simplest repayment model. A greater amount of the payment is applied to interest at the beginning of the amortization schedule, while more money is applied to principal at the end.

The amortization formula is: (1-vⁿ)/i, where n = number of years, v = 1/(1+i), and i = interest rate / 100.

Divide by (1+i) if a payment is due at the beginning.

Another method of writing this kind of formula is:

$A \;= \;P\;\frac{i(1 + i)^n}{(1 + i)^n - 1}$

where: P = principal amount borrowed i = periodic interest rate n = number of periods A = periodic payment.

1 Accounting
2 Amortization schedule
- 2.1 Example amortization schedule
3 External links

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Accounting

In accounting, amortization refers to the gradual recognition of certain expenses associated with intangible assets such as trademarks, copyrights, and so on, typically over a period of several years. The expenses are initially added to the value of the asset, and transferred from the balance sheet to the income statement using a fixed schedule, usually a constant amount per month (or other accounting period). The corresponding concept for tangible assets is termed depreciation.

The proper use of amortization allows the organization to properly recognize that such expenses contribute to productivity or profitability over a relatively long period. The determination of which intangible assets can be amortized and what period to use can have significant effects on the apparent profitability of an enterprise, and consequently can affect the stock price of a publicly traded corporation. It can also significantly affect the corporation's tax liability, and is an area of concern for those who must comply with the Sarbanes-Oxley Act.

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Amortization schedule

An amortization schedule is a table detailing each periodic payment on a loan (typically a mortgage), as generated by an amortization calculator. Amortization schedules are calculated so that each periodic payment for the entirety of the loan is equal.

While a portion of every payment is applied towards both the interest and the Principle balance of the loan, the exact amount applied to principal each time varies (with the remainder going to interest). An amortization schedule reveals the specific dollar amount put towards interest, as well as the specific put towards the Principal balance, with each payment. Initially, a large portion of each payment is devoted to interest. As the loan matures, larger portions go towards paying down the principal.

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Example amortization schedule

This amortization schedule is based on the following assumptions:

Principal = $100,000
Annual interest rate = 8%
Number of payments = 360 (30 years x 12 months x 1 payment per month)
Amortized Payment = $733.76

# of payments	Principal	Interest	Principal to-date	Interest to-date	Principal balance
1	67.09	666.67	67.09	666.67	99932.91
2	67.54	666.22	134.63	1332.89	99865.37
3	67.99	665.77	202.62	1998.66	99797.38
4	68.44	665.32	271.06	2663.98	99728.94
5...	68.90	664.86	339.96	3328.84	99660.04
...359	724.03	9.73	99264.28	164155.56	735.72
360	735.72	4.90	100000.00	164160.46	0.00