Legal Definitions - amortizement

Amortizement refers to the systematic process of paying off a debt or gradually writing off the cost of an asset over a period of time. When applied to debt, it involves making regular, scheduled payments that cover both the principal amount borrowed and the interest accrued, ensuring the debt is fully repaid by the end of the term. When applied to assets, particularly intangible ones, it is the accounting process of expensing the cost of the asset over its useful life, similar to depreciation for tangible assets.

Here are some examples to illustrate amortizement:

• Home Mortgage: A family purchases a home with a 30-year mortgage. Each month, they make a fixed payment to the lender. This payment is an act of amortizement, as it systematically reduces the outstanding principal balance of the loan while also covering the interest due. Over the three decades, these regular payments ensure that the entire loan amount, plus interest, is fully repaid by the end of the term.

• Patent Cost: A technology company develops a new software feature and obtains a patent for it, incurring significant legal and development costs totaling $500,000. Instead of recording this entire cost as an expense in the year the patent is granted, the company uses amortizement. If the patent has an estimated useful life of 10 years, the company will expense $50,000 of the patent's cost each year for 10 years, reflecting the gradual consumption of the patent's economic value over its lifespan.

• Business Equipment Loan: A construction company takes out a five-year loan to purchase new heavy machinery. The loan agreement specifies monthly payments that include both a portion of the principal amount borrowed and the interest accrued. The company's financial department tracks this amortizement schedule, ensuring that each payment contributes to the systematic reduction of the loan balance, leading to its full repayment by the end of the five-year period.