Dictionary / Amortization
What does Amortization mean in accounting?
Quick definition
Accrual & timingThe gradual extinguishment of any amount over a period of time. This term guides how bookkeepers record, classify, and explain related transactions in routine financial reporting.
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Examples
A year's software you spend down each month
You run a pest-control company. On March 11 you pay a software vendor $1,488 for a 12-month dispatch subscription and code the card charge to prepaid expense, not software expense. At the March 31 close you amortize one month: debit Software expense $124 and credit Prepaid software $124. The balance sheet prepaid drops by $124, March's P&L shows only that month's slice, and you set a recurring journal in QuickBooks Online or Xero through next February. Watch the prepaid balance; if March ate the full $1,488, later months look free.
The chipper is depreciation, not this
You run a tree-care company. On August 19 you buy a used chipper from an equipment dealer for $22,800 and add it as a fixed asset. At the August 31 close you start writing $380 a month to expense and label the line amortization. That write-down is depreciation: the chipper is a physical asset, so recode the recurring entry to depreciation expense and accumulated depreciation. Leave the label as amortization and a reader will look for a prepaid, a loan, or an intangible that is not there.
Why it matters
Amortization is how a prepaid expense, loan principal, or intangible shrinks over the months it covers. You will post it most month-ends if you carry any of those, after you pay for a stretch of coverage, borrow, or buy a right that lasts more than one month; you will not if every cost is used in the same period you pay it. Expense the whole amount in the payment month and profit looks wrecked; leave the prepaid or the loan sitting and later months look too clean. Do not mix this with depreciation, which writes down a physical asset, not a prepaid, remaining principal, or an intangible.
Further reading
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What is Amortization in bookkeeping?
The gradual extinguishment of any amount over a period of time.
When should I use Amortization?
Use Amortization when the transaction facts match its definition and you need the ledger and financial statements to reflect the correct account and period.
What is a common mistake with Amortization?
Amortization is used for amortization entries, while Abandonment covers a related but distinct bookkeeping purpose. Review both terms before posting unusual transactions. A common mistake is applying it by label only instead of checking the underlying transaction details.