Amortisation definition

Amortisation is the process of spreading a cost or a repayment across a set period. It applies both to repaying a loan in instalments and to writing down the cost of an intangible asset in the accounts.

In lending, amortisation reduces a loan balance through scheduled payments that combine principal and interest, so each payment lowers the outstanding debt until the loan is cleared. In accounting, amortisation charges the cost of an intangible asset against profit over its useful life, so the cost lands in the same periods the asset helps to earn revenue.

Amortisation differs from depreciation by the type of asset it covers. Amortisation spreads the cost of intangible assets such as patents, trademarks, licences, and software, as well as the principal on a loan. Depreciation spreads the cost of tangible assets such as buildings, machinery, and vehicles. Both write down value over time, but they sit on different lines in the accounts.