The idea of amortization can refer to the depreciation of a value over time.
Amortization is the act and result of amortizing . This verb , which comes from the Latin word admortizare , refers to the extinction of the capital of a debt , the compensation or recovery of an investment and the elimination of vacant positions in an entity .
The idea of amortization, in this way, is used in the field of accounting and economics . The concept is usually used with respect to the depreciation of a value over time , since it is divided into different periods.
Amortization of a debt
According to the first of the meanings mentioned above, amortization can be the payment of a debt in installments , including the disbursement of the corresponding interest . With each payment, the debtor reduces the debt and pays interest.
Amortizations are said debt payments. That is to say: each disbursement made to reduce the debt is an amortization. Depending on how interest is paid, amortization can be carried out with the American system , the German system or the French system , which are described below:
- The American system : recognizes only one amortization, which is carried out when the life of the loan ends, since throughout this period interest must simply be paid. Since there are no principal payments that take place between the beginning and the end of the debt, the value of the annual interest can be fixed. It is possible to say that this concept is opposed to that of depreciation .
- The German system : this is also known as the fixed amortization installment system , which largely describes the concept, as well as the fact that the total installment and interest are decreasing. One of its main features is that in each annuity the interest must be paid in advance.
- The French system : in this case, the objective is to define a fixed fee, and to do this a calculation must be made on the compound interest that allows the increasing (which can also be considered the principal) to be segregated from the decreasing.
The extinction of the capital of a debt is called amortization.
Loss of value through use
A technical depreciation , on the other hand, is carried out as an asset loses value due to its use or over time. To compensate for this loss , it is common for companies to establish amortization funds : each year they make a financial contribution so that, when the useful life of the asset that was amortized has ended, it can be replaced.
In simpler words, amortization involves considering the loss in value of a good (an asset of a company) over the years. If companies did not take the trouble to bear this depreciation that their immobilized assets go through throughout the year, then decapitalization would occur, which in general terms we could describe as impoverishment, and that is why it is so important to establish a policy of amortization.
Other uses of the term amortization
One of the meanings of the term amortize presented by the dictionary of the Royal Spanish Academy ( RAE ) defines it as the "recovery or compensation of the funds that have been invested in a company" , and this leads us to one of the uses it receives in everyday speech, which refers to "having properly used a product ."
Let's look at some example sentences of this last meaning in popular language: "The truth is that with all these trips we cannot deny that we have paid for the car," "Don't worry about the breakdown, this device was already more than paid for afterward." after so many years of use" , "I know it is a very expensive computer, but it is worth it because I know that I am going to pay for it" .