Amortization is an accounting method used to gradually reduce the book value of an intangible asset or repay a loan over a set period of time. It serves two primary purposes depending on the context: allocating the cost of an intangible asset and systematically paying off debt.

When applied to intangible assets—such as patents, trademarks, copyrights, or goodwill—amortization spreads the cost of the asset over its useful life. This reflects the asset’s consumption or expiration over time and is recorded as an expense on the income statement. For example, if a company purchases a patent for $100,000 with a 10-year useful life, it may amortize $10,000 annually.

In the context of loans, amortization refers to the process of paying off the debt in regular installments that include both principal and interest. Each payment gradually reduces the outstanding balance until the loan is fully repaid. An amortization schedule outlines each payment and the remaining balance after each period.

Amortization helps businesses match expenses to revenues over time, ensuring more accurate financial reporting. It also provides transparency in loan repayment and asset valuation. Overall, amortization is a vital financial tool in both asset management and debt servicing.