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Amortization
The gradual write-off of an intangible asset's cost or a loan principal over time.
Amortization
Amortization has two meanings in finance—one for intangible assets and one for loans.
Intangible asset amortization
Similar to depreciation but for intangible assets with finite lives:
- Patents: Amortized over their legal life (typically 20 years)
- Software: Amortized over expected useful life (3–7 years)
- Customer lists: Amortized over estimated customer retention period
Note: Goodwill and trademarks with indefinite lives are NOT amortized.
Loan amortization
The process of paying off a loan through scheduled principal and interest payments:
- Early payments are mostly interest
- Later payments are mostly principal
- An amortization schedule shows the exact split for each payment
Why it matters for investors
- Amortization of intangibles is a non-cash expense (similar to depreciation)
- Adjusted earnings often add back amortization for a clearer picture
- Heavy intangible amortization after acquisitions can depress reported earnings without affecting cash flow
Key Takeaways
- Context matters when interpreting any financial metric.
- Combine multiple data points for informed decisions.
- Continue learning to build investment knowledge.
Quick Reference
Category
Accounting
Difficulty
Beginner
Reading Time
1 min
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Where You'll See This
This concept appears throughout stock detail pages and financial data.