Amortization in Dictionary

The term amortization refers to the decrease of a credit or debt. In this case, it is the name of each payment made in order to settle the existing commitment. It is also known as financial amortization.

On the other hand, amortization is understood as the loss of value of an active asset over time. This decrease must be recorded periodically in the accounting of the company during the useful life of said asset.

In this case, “depreciation” would be the most appropriate term to express the progressive decrease in the value of a company’s assets, however, in many countries accounting regulations use the term amortization or technical amortization.

The word amortization comes from the Latin admortizare, which refers to the cancellation of a debt.

Financial amortization

This term can only be used if debt payments contribute to lower capital. To calculate the amount of depreciation, any of the following methods can be used.

  • American system: during the loan period only interest is paid. Debt repayment is done when the period ends.
  • German system: depreciation with fixed fees, but interest is paid in advance on each annuity.
  • French system: consists of amortizations with fixed capital and interest installments.

Technical amortization

The assets of a company can lose value for multiple reasons ranging from the end of its useful or technical life, its obsolescence (the assets still work, but they are inefficient against new technological developments), inflation, etc.

A technical amortization calculates the value of that depreciation, which allows the company to take accounting and economic measures to assume the return of those assets at the appropriate time.

To do this, a depreciation fund is created, which are endowments of money that the company makes periodically, to guarantee financial resources available at the time when an asset meets its useful life. This way it can be replaced quickly.

The amount or amount of money allocated to the amortization fund depends on each company, but to calculate it, the annual depreciation of the assets to be replaced must be taken into account, their estimated useful life, if the fund will cover the original cost or If you plan to consider the replacement cost, among other criteria.