Legal Definitions - amortizement

Definition: Amortizement is the process of gradually paying off a debt, such as a mortgage, by making regular payments of principal and interest. It can also refer to the apportioning of the initial cost of an intangible asset, such as a patent, over its useful life.

Example 1: When you take out a mortgage to buy a house, you will make regular payments to the lender. These payments will be applied to both the principal (the amount you borrowed) and the interest (the cost of borrowing the money). Over time, as you make these payments, the amount of the debt will gradually decrease until it is fully paid off. This process is called amortization.

Example 2: Let's say a company spends $100,000 to acquire a patent that will be useful for 10 years. Instead of expensing the entire cost in the year of purchase, the company can spread the cost over the patent's useful life. This means that each year, the company will record $10,000 of amortization expense on its income statement, reflecting the portion of the patent's cost that has been used up during that year.

Both examples illustrate the concept of amortizement, which involves spreading out the cost of an asset or debt over time. By doing so, the financial impact of the asset or debt is more accurately reflected in the company's financial statements, and the burden of paying off the debt is spread out over a longer period of time, making it more manageable.