In accounting, amortization is similar to a depreciation method in which the amount decreases over the period. The accounting of this decreasing amount is amortization. If the company has taken out an amortization loan, it will need to make periodic payment for this loan. Since these payments will be in the installation form spread over the life of the loan, the company will need a schedule to make these payments. This schedule will define the payments and their frequency, along with the amount left to pay and the number of the payments in which this amount is to be paid. The amortization schedule covers all of these elements of the periodic payments.
The periodic payments of amortizing loans are generated with the help of an amortization calculator. The amortization schedule is also used to determine the portion of the interest in each payment of the loan in addition to the principle. For each period, a specific amount of the amortization loan is allocated to the interest while the other amount consists of the principle of the loan. In this schedule, the amount of the loan paid allocated to the principle differs from payment to payment. The remaining part of the payment is allocated to the interest.
Since the amortization, schedule reveals the specific amount of payment allocating to the interest and principle, it is better to understand the ratio of the interest to principle in this manner: at the start of payments, the larger portion of the payment is allocated to the interest. As the payments are constantly being made, and loan starts to mature, the amount relating to the principle starts to increase and allocation of interest in the payment's decrease considerably.
The amortization schedule is a multi-column schedule that shows the amount balance in an organized manner over the useable life of the item. The amortization schedule is made in the following manner:
- Column 1: The number of the payment
- Column 2: Amount of the total payment
- Column 3: Amount of interest being paid
- Column 4: Amount of the principle being paid (the difference of total payment and the interest)
- Column 5: The balance of the principle after payment (difference of previous balance and the current balance)
Start free ReadyRatios
reporting tool now!
- Debt ratios
- Liquidity ratios
- Profitability ratios
- Asset management ratios
- Cash Flow Indicator Ratios
- Market value ratios
- Financial analysis
- Business Terms
- Financial education
- International Financial Reporting Standards (EU)
- IFRS Interpretations (EU)
- Financial software