Amorization & Amortization Schedule
What is an Amortization Schedule?
An amortization schedule is a multi-column table laying out the details of a loan.
![am1](https://seeaccountingnow.online/wp-content/uploads/2021/08/am1.jpg)
What is Amortization?
As with depreciation, amortization refers to a loss of value over time.
![am2](https://seeaccountingnow.online/wp-content/uploads/2021/08/am2.jpg)
Depreciation applies to tangible assets such as buildings and machinery.
![am3](https://seeaccountingnow.online/wp-content/uploads/2021/08/am3.jpg)
Tangible assets are those you can see and touch.
![am4](https://seeaccountingnow.online/wp-content/uploads/2021/08/am4.jpg)
The asset starts off at a certain value—usually cost price.
![am5](https://seeaccountingnow.online/wp-content/uploads/2021/08/am5.jpg)
Then, each year, it loses value.
![am6](https://seeaccountingnow.online/wp-content/uploads/2021/08/am6.jpg)
The loss of value on a tangible asset is known as depreciation.
![am7](https://seeaccountingnow.online/wp-content/uploads/2021/08/am7.jpg)
Amortization refers to intangible things, such as bonds and loans.
![am8](https://seeaccountingnow.online/wp-content/uploads/2021/08/am8.jpg)
For example, a company may take out a loan.
![am9](https://seeaccountingnow.online/wp-content/uploads/2021/08/am9.jpg)
Over time, the company will make principal payments and pay the load down.
![am10](https://seeaccountingnow.online/wp-content/uploads/2021/08/am10.jpg)
The principal payments are a cost to the company.
![am11](https://seeaccountingnow.online/wp-content/uploads/2021/08/am11.jpg)
They are just one of the costs necessary to create revenue each period.
![am12](https://seeaccountingnow.online/wp-content/uploads/2021/08/am12.jpg)
As such, the payment needs to be shown as an expense for the period.
![am13](https://seeaccountingnow.online/wp-content/uploads/2021/08/am13.jpg)
This way, it can be matched against the period’s revenue, thereby satisfying the matching principle of accounting.
![am14](https://seeaccountingnow.online/wp-content/uploads/2021/08/am14.jpg)
Principal and Interest Payments
Along with principal payments, you need to record interest on the loan each period.
![am15](https://seeaccountingnow.online/wp-content/uploads/2021/08/am15.jpg)
This way, you can show the total loan costs involved in generating revenue for the period.
![am16](https://seeaccountingnow.online/wp-content/uploads/2021/08/am16.jpg)
With principal and interest loan payments, the payment amount is the same each period.
![am17](https://seeaccountingnow.online/wp-content/uploads/2021/08/am17.jpg)
However, the principal and interest components of the payment vary.
![am18](https://seeaccountingnow.online/wp-content/uploads/2021/08/am18.jpg)
The interest component starts off higher—and progressively gets lower.
![am19](https://seeaccountingnow.online/wp-content/uploads/2021/08/am19.jpg)
While the principal component starts off lower—and progressively gets higher.
![am20](https://seeaccountingnow.online/wp-content/uploads/2021/08/am20.jpg)
Amortization Schedule
To simply payments, you set up an amortization schedule when the loan is first taken out.
![am21](https://seeaccountingnow.online/wp-content/uploads/2021/08/am21.jpg)
The amortization schedule lays out all the elements of the loan, including loan amount, rate of interest, term, payment amounts, and so on.
![am22](https://seeaccountingnow.online/wp-content/uploads/2021/08/am22.jpg)
It is in a multi-columnar format showing details of each payment.
![am23](https://seeaccountingnow.online/wp-content/uploads/2021/08/am23.jpg)
The payment number column shows what payment number the payment is.
![am24](https://seeaccountingnow.online/wp-content/uploads/2021/08/am24.jpg)
The date column shows the date the payment was made.
![am25](https://seeaccountingnow.online/wp-content/uploads/2021/08/am25.jpg)
The balance column shows the loan’s balance before the payment was made.
![am26](https://seeaccountingnow.online/wp-content/uploads/2021/08/am26.jpg)
The payment column shows the payment amount.
![am27](https://seeaccountingnow.online/wp-content/uploads/2021/08/am27.jpg)
The interest column shows the interest component of the payment, which decreases over time.
![am28](https://seeaccountingnow.online/wp-content/uploads/2021/08/am28.jpg)
The principal column shows the principal component of the payment, which increases over time.
![am29](https://seeaccountingnow.online/wp-content/uploads/2021/08/am29.jpg)
Finally, the end balance column shows the loan’s balance after the payment is made.
![am30](https://seeaccountingnow.online/wp-content/uploads/2021/08/am30.jpg)
As you come to each payment, you refer to the schedule for the payment details.
![am31](https://seeaccountingnow.online/wp-content/uploads/2021/08/am31.jpg)