What is Amortization?

Loan amortization
Amortization of intangible assets

Amortization means two different things in business. For a loan, it's how each payment is split between interest and principal until the balance reaches zero. For an intangible asset, such as a purchased copyright, patent or client list, it's spreading the asset's cost over the years you expect it to be useful, so part of the cost becomes an expense each year. The OpenStax accounting textbook defines both in one entry: amortization is the "allocation of the costs of intangible assets over their useful economic lives; also, process of separating the principal and interest in loan payments over the life of a loan".

Billed publishes this page. Definitions are quoted from the open textbook OpenStax Principles of Accounting, Volume 1, and US tax rules from IRS Publication 946 (2025) and the Instructions for Form 4562 (2025), all opened on October 29, 2026. This isn't tax or accounting advice. For how amortization applies to your business, ask your accountant.

Loan amortization

OpenStax puts it this way: "Amortization is the process of separating the principal and interest in the loan payments over the life of a loan." A loan repaid in equal payments that cover both is a fully amortized loan.

How each payment is split:

Interest comes first. In OpenStax's words, "each payment is first applied to any applicable interest expenses, with the remaining funds reducing the principal balance of the loan."
The split shifts over time. Interest is charged on the balance still owed, and the balance falls after every payment. So with equal payments, "the portion allocated to interest is reduced each year, and the amount allocated to principal reduction increases an equal amount."
An amortization table lists every payment. OpenStax: "An amortization table calculates the allocation of interest and principal for each payment and is used by accountants to make journal entries."

In the books, the interest part of each payment is an expense. The principal part isn't an expense: it reduces the loan, which is a liability.

Amortization of intangible assets

OpenStax defines an intangible asset as an "asset with financial value but no physical presence; examples include copyrights, patents, goodwill, and trademarks".

What's recorded: "Intangibles are recorded at their acquisition cost, as are tangible assets." Costs of developing one yourself are treated differently: "The costs of internally generated intangible assets, such as a patent developed through research and development, are recorded as expenses when incurred."
How it's spread: OpenStax's examples use the straight-line method with no salvage value. A copyright bought for $10,000 and expected to sell for ten years is amortized at "$1,000 a year ($10,000/ten years)". The yearly amount is credited to the asset itself, as "no accumulated amortization account is needed".
Not every intangible is amortized. A purchased trademark "may be seen as having an indefinite life, in which case there would be no amortization." For goodwill, OpenStax says: "Goodwill does not have an expected life span and therefore is not amortized." Instead, its book value is compared with its market value, which OpenStax calls testing for impairment. Accounting standards set the goodwill rules, and they differ by framework and type of company, so ask your accountant which apply to yours. See what goodwill is.

Amortization vs. depreciation

Both spread a cost over the years an asset is used. The difference is the type of asset. OpenStax defines depreciation as the "process of allocating the costs of a tangible asset over the asset's economic life", such as equipment or vehicles, while amortization covers intangible assets. See how to calculate depreciation or try Billed's depreciation calculator.

Worked example (sample figures)

A sample design studio, invented for this example, buys a retiring designer's client list for $9,000 on January 1. It pays with a $9,000 loan at 6% a year, repaid in three equal yearly payments. The studio expects the client list to bring in work for three years.

Part 1: the loan. The equal payment is loan × rate ÷ (1 − (1 + rate)^−years) = $9,000 × 0.06 ÷ (1 − 1.06^−3) = $3,366.99 a year.

Year 1: interest $9,000 × 6% = $540.00; principal $3,366.99 − $540.00 = $2,826.99; balance $9,000 − $2,826.99 = $6,173.01.
Year 2: interest $6,173.01 × 6% = $370.38; principal $3,366.99 − $370.38 = $2,996.61; balance $6,173.01 − $2,996.61 = $3,176.40.
Year 3: interest $3,176.40 × 6% = $190.58; principal $3,176.40, which clears the balance; payment $190.58 + $3,176.40 = $3,366.98 (one cent less, from rounding).
Totals: principal $2,826.99 + $2,996.61 + $3,176.40 = $9,000.00; interest $540.00 + $370.38 + $190.58 = $1,100.96.

Journal entry for the year 1 payment:

Debit Interest Expense: $540.00
Debit Loan Payable: $2,826.99
Credit Cash: $3,366.99

Debits $540.00 + $2,826.99 = $3,366.99, which equals the credit.

Part 2: the client list. Straight-line over three years with no salvage value: $9,000 ÷ 3 = $3,000 a year.

Journal entry at the end of each year:

Debit Amortization Expense: $3,000
Credit Client List: $3,000

The client list's book value falls from $9,000 to $6,000, $3,000 and then $0.

What year 1 shows:

Expenses: amortization $3,000 + interest $540.00 = $3,540.00.
Cash paid: $3,366.99, the loan payment. The amortization expense uses no cash in year 1; the cash for the client list came from the loan.
End of year 1: the client list is $6,000 and the loan is $6,173.01.

US tax: section 197 intangibles (US)

US tax rules for amortization can differ from the accounting above:

Pub 946: IRS Publication 946 (2025) lists "Section 197 intangibles. You must amortize these costs." among property you can't depreciate.
Form 4562 instructions: the Instructions for Form 4562 (2025) say: "The following intangibles must be amortized over 15 years (180 months) starting with the later of (a) the month the intangibles were acquired, or (b) the month the trade or business or activity engaged in for the production of income begins."
The list: it includes goodwill, "A patent, copyright, formula, process, design, pattern, know-how, format, or similar item", "A customer-based intangible (for example, composition of market or market share)" and "A franchise, trademark, or trade name (including renewals)".

So the same asset can be amortized over one period in your books and over 15 years on a US tax return. Ask your accountant which rules apply to a specific asset.

Where Billed fits

Loan payments: Billed's loan payment calculator works out a monthly payment from the loan amount, the annual interest rate and the term in months, and shows how payments split between interest and principal.
Asset amortization: the Billed pages I checked (/features/, /expenses-and-receipts-tracking/ and /financial-reporting/) don't describe amortizing intangible assets. Your accountant records amortization. Billed's expense tracking page says its reports "can be filtered by date range and exported for your accountant, bookkeeper or tax software."

When this guide isn't for you

This is an introduction for small business owners. Goodwill and impairment, software you develop yourself, leases and bond premiums or discounts follow their own rules, so ask your accountant.

Frequently Asked Questions

What is the difference between amortization and depreciation?

Both spread an asset's cost over the years it's used. Depreciation applies to tangible assets, such as equipment and vehicles. Amortization applies to intangible assets, such as copyrights, patents and purchased client lists. Amortization also has a second meaning: splitting loan payments into interest and principal.

How is a loan payment split between interest and principal?

Each payment first covers the interest on the balance still owed, and the rest reduces the balance. Because the balance falls after every payment, the interest part shrinks and the principal part grows. In this page's sample, the first $3,366.99 payment on a $9,000 loan at 6% is $540.00 interest and $2,826.99 principal.

Is amortization a cash expense?

Amortization of an intangible asset is an expense that uses no cash in the year it's recorded; the cash left when the asset was bought. Loan payments are the reverse: the principal part is cash leaving the business but isn't an expense, because it reduces the loan.

Is goodwill amortized?

In accounting, OpenStax says goodwill is not amortized and is tested for impairment instead, but the rules differ by framework and type of company. For US tax, the Instructions for Form 4562 list goodwill among section 197 intangibles amortized over 15 years. Ask your accountant which rules apply to you.

Can startup costs be amortized?

In the US, yes. The Instructions for Form 4562 (2025) say "you can elect to deduct a limited amount of startup or organizational costs for the year that your business begins", and "Any cost not deducted currently must be amortized ratably over a 180-month period." Ask your accountant how this applies to your costs.

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What is Amortization? A Simple Guide for Small Business