Glossary · Assets and depreciation
Amortization
Amortization is spreading an amount evenly over time. In accounting it has two common meanings: writing off the cost of an intangible asset, such as a patent or purchased software licence, over its useful life, and paying off a loan in scheduled instalments that split between interest and principal until the balance reaches zero.
Glossary / Amortization
How it works
For intangible assets, amortization works like straight-line depreciation: cost divided by useful life, posted to amortization expense each year, with accumulated amortization reducing the asset's book value. In Canada the word is also used in many financial statements for what US readers call depreciation.
For a loan, an amortization schedule lists every payment. Early payments are mostly interest, because interest is charged on a large balance. As the balance falls, more of each payment goes to principal. Only the interest part is an expense; the principal part reduces the loan liability on the balance sheet.
Worked example: A $20,000 equipment loan at 6% over 3 years
The monthly payment on $20,000 at 6% a year for 36 months is $608.44. In month one, interest is $20,000 × 0.5% = $100.00, so $508.44 reduces the balance to $19,491.56. In month two, interest is $97.46 and principal is $510.98.
The bookkeeping entry for the first payment debits Interest Expense $100.00 and the Loan Payable account $508.44, and credits the bank $608.44. Recording the whole $608.44 as an expense would overstate costs and leave the loan balance wrong.
| Month | Payment | Interest | Principal | Balance |
|---|---|---|---|---|
| 1 | $608.44 | $100.00 | $508.44 | $19,491.56 |
| 2 | $608.44 | $97.46 | $510.98 | $18,980.58 |
| 3 | $608.44 | $94.90 | $513.54 | $18,467.04 |
In AcboBooks
The Loans screen tracks each loan's original amount, annual rate and monthly payment, shows the amortization schedule, and records each payment split between principal and interest, with any extra principal, from the bank account you choose.
Related terms
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Updated October 25, 2026. General information, not tax, legal or accounting advice. Rules and rates change; check with the IRS, the CRA, your state or province, or your accountant.
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