Amortization.
aka amortisation, spreading the cost, loan amortization
Spreading a big cost or a loan into smaller pieces over time.
What it actually means
Amortization means spreading a cost or a debt over a period of time instead of counting it all at once. In accounting it is how the cost of intangible assets, like software, patents or licenses, is expensed over their useful life. With loans it describes paying off the balance through regular installments that cover both interest and principal.
Here is the simple version. A design studio pays 30,000 for a five year software license. Counting all 30,000 as an expense in year one would make that year look terrible and the next four look unusually good. Instead, the studio amortizes it: 6,000 of expense each year for five years. The asset on the balance sheet shrinks by 6,000 a year until it reaches zero. This is the same idea as depreciation, but depreciation is used for physical things like vans and machines, while amortization is used for intangible ones. Together they are the "D" and "A" in EBITDA.
The second meaning shows up with loans. If you borrow 100,000 for ten years, an amortization schedule is the table that shows every payment, how much goes to interest and how much reduces the debt. Early payments are mostly interest; later ones mostly pay down the balance, even though the monthly amount stays the same. The nuance is that both meanings are about spreading over time, but one is an accounting entry and the other is real cash leaving your account. Amortization of software does not cost cash each year, because the cash was paid upfront. Loan amortization does, every single month. Also, rules on what can be amortized and over how long differ by country and accounting standard.
Where you'll hear it
The acquisition looks expensive this year, but most of that hit is amortization of the customer contracts we bought, not cash going out.
Translation: the cost of what they bought is being spread over several years in the accounts, and the cash was already paid.
Also in mortgage and business loan offers, in EBITDA discussions, in acquisition reports where purchased customer lists or brands are amortized, in tax conversations, and in phrases like "fully amortized", meaning the cost or the loan has been completely spread out and paid off.
The pop-culture version
A festival pass costs 600, and the organizer lets you pay 50 a month for a year. Instead of one painful hit, the cost is spread into small, predictable pieces.
Now imagine you paid the full 600 upfront for a pass that covers three festivals over three years. In your own budget, you might count 200 a year, one festival's worth each time.
The first is like loan amortization: real payments over time. The second is like accounting amortization: the money is already spent, but you spread its cost across the years you enjoy it.
The practical rule: whenever you hear amortization, ask whether it means a loan being repaid in cash or an accounting cost being spread out. The answer changes everything about cash.
Say it like you mean it
“We amortize the software license over five years, so it adds 6,000 a year to expenses.”
It names the asset, the period and the yearly impact.“Amortization means we'll pay the software vendor 6,000 every year.”
The cash may have been paid upfront; amortization is only how the cost is recorded over time.You will also hear "amortization schedule", the table showing every loan payment, and "negative amortization", when loan payments are too small to cover the interest, so the debt actually grows. That second one is usually a warning sign.
An in depth guide to depreciation, depletion and amortization, how each spreads costs over time and how they affect profit and tax.
Decoded next
Decoded by the Kurums editorial team. Kurums Decoded translates the language of business for people who are new to it. Definitions are kept short on purpose; the serious version above goes deep. Nothing here is financial, legal or career advice.
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