Definition - What does Amortization mean?

Amortization is the timeline made for paying loans which would cover both the principal amount and the interest rates. It also refers to the length of time that an asset can generate income for business.

Insuranceopedia explains Amortization

When a person receives a loan, he or she is shown the schedule of payments which starts at the date of the first payment until the last one. He or she is usually given a copy as a reminder for him or her to pay on time.

Amortization also refers to the lifespan of a company asset. Suppose that a grocery store buys a vending machine. The expected time that this machine will be usable (and therefore income-generating) is factored in the purchase decision.

In terms of business accounting, an insurance policy is amortized as a prepaid asset. It is because a person pays for an insurance but its benefits cannot be consumed at the time that it is paid.

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