What is amortization?

what is amortization

Do you know what amortization is and how it affects your assets or liabilities? You have probably never asked yourself. But amortization is a term that has many financial and accounting connotations.

Did you know that the assets around you have a useful life and depreciate over the years? This means that absolutely everything you have in your company pertaining to tangible or intangible assets must be part of your amortization .

This means that it must appear in the accounts so that the Treasury does not consider that it has a problem with you. However, don't think that this term only applies to assets.

Quite the opposite! Liabilities are also subject to amortization. But don't worry if you're not sure yet. Later we will explain in more detail what it is and how it affects assets and liabilities.

What is the depreciation of an asset?

Amortization is essential for your business. This term refers to the irreversible and systematic loss of value of all assets that may be under your company's control. For this reason, companies must periodically keep a record, it can be monthly or yearly, of their depreciation.

In other words, all those assets that you use to manage your business, no matter how small that asset, loses its value as it is being used. This loss is what is called amortization , both in accounting and taxation.

For example, if you pay € 2,000 for a computer, this expense is not expressed in a single accounting year. If not, it affects for a maximum of 10 years. This means that in your accounting you would have to record the € 200 of said expense until you cover the full price.

However, all the assets stipulated within the depreciation have a significant impact on the payment of corporation tax. But if you are a self- employed worker, it affects the Personal Income Tax.

When you are making such a record you must take into account changes in the market price or other reductions in the value of the goods. All this must be considered in relation to the time that has passed since you have it in possession.

It is worth mentioning that everything previously stated is known as accounting amortization . However, there is also financial amortization, which we will define below.

What does it mean to amortize a liability?

Financial amortization refers to the return or payment of a debt plus interest, within the established maturity period. This means that the amortization of a loan or a liability is nothing more than the payment of the money owed by adding the interest.

Now, when we talk about the repayment of a loan. The figure of the amortization table also appears. In general, this table allows you to review the evolution of the debt as the payment term passes. That is, as the months go by and you pay the installments, you will pay less interest and more of the debt.

Usually, many loan simulators allow you to visualize your loan repayment schedule. In this way, you will be able to see the historical behavior of your debt.

Ways to pay off a loan

In the United States there are many ways to repay a loan. However, the most widely applied by credit companies is the well-known French model. This model is characterized by constant decreasing amortization installments. This means that you pay more at the beginning of the loan than in the final installments.

However, although it is the most common way, it is not as beneficial for companies looking to use a loan to leverage a new project. This is because, usually, projects are more profitable over time.

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