why is amortization important 
amortization is important because it helps businesses and investors understand and forecast their costs over time in the context of loan repayment amortization schedules provide clarity concerning the portion of a loan payment that consists of interest versus the portion that is principal this can be useful for purposes such as deducting interest payments on income tax forms it is also useful for planning to understand what a company s future debt balance will be after a series of payments have already been made amortizing intangible assets is important because it can reduce a business s taxable income and therefore its tax liability while giving investors a better understanding of the company s true earnings intangible assets also have a finite useful life over time trademarks or patents may lose their value due to obsolescence amortizing intangible assets is also a reflection of how a company has used up the benefit of these assets amortization vs depreciationamortization and depreciation are similar concepts in that both attempt to capture the cost of holding an asset over time the main difference between them however is that amortization refers to intangible assets whereas depreciation refers to tangible assets examples of intangible assets include trademarks and patents tangible assets include equipment buildings vehicles and other assets subject to physical wear and tear another difference is the accounting treatment in which different assets are reduced on the balance sheet amortizing an intangible asset is performed by directly crediting reducing that specific asset account alternatively depreciation is recorded by crediting an account called accumulated depreciation a contra asset account the historical cost of fixed assets remains on a company s books however the company also reports this contra asset amount as a net reduced book value amount finally the calculation of each can be different this is especially true when comparing depreciation to the amortization of a loan intangible assets are often amortized over their useful life using the straight line method while fixed assets often use a much more broad set of calculation methods i e declining balance method double declining balance method sum of the years digits method or the units of production method example of amortizationlet s look at a four year 30 000 auto loan at 3 interest the monthly payment is going to be 664 03 that is arrived at as follows 30 000 0 0025 1 0025 48 1 0025 48 1 begin aligned 30 000 times bigg frac 0 0025 times 1 0025 div 48 1 0025 div 48 1 bigg end aligned 30 000 1 0025 480 0025 1 0025 48 1 in the first month 75 of the 664 03 monthly payment goes to interest 30 000 loan balance 3 interest rate 12 months begin aligned 30 000 text loan balance times 3 text interest rate div 12 text months end aligned 30 000 loan balance 3 interest rate 12 months the remaining 589 03 goes toward the principal 664 03 total monthly payment 75 interest payment begin aligned 664 03 text total monthly payment 75 text interest payment end aligned 664 03 total monthly payment 75 interest payment the total payment stays the same each month while the portion going to principal increases and the portion going to interest decreases in the final month only 1 66 is paid in interest because the outstanding loan balance at that point is very minimal compared with the starting loan balance 