Meaning of Amortization


Amortization is called the act and the 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 often used with respect to the depreciation of a security over time, since it is divided into different periods.

According to the first of the meanings mentioned above, the amortization can be the payment of a debt in installments, including the disbursement of the corresponding interests. With each payment, the debtor reduces the debt and pays the interest.

Amortizations are those debt payments. That is to say: each disbursement that is made to reduce the debt is an amortization. Depending on how interest is paid, amortization can be done using the American system, the German system or the French system, which are described below:

* The American system: it only recognizes an amortization, which is made when the life of the loan ends, since throughout this period you simply have to pay interest. Since there are no principal payments that take place between the beginning and the end of the debt, the annual interest value can be set. It is possible to say that this concept is opposed to that of depreciation;

* The German system: this is also known as the fixed repayment 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 quota, and for this a calculation must be made on compound interest that allows the increasing (which can also be considered the main) to be segregated from the decreasing ones.

A technical amortization, on the other hand, is carried out as a good 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 amortized good has ended, it can be replaced.

In simpler words, depreciation involves considering the loss in value of a good (a company asset) over the years. If companies did not take the trouble to load this depreciation that their fixed assets go through throughout the year, then there would be a decapitalization, which in general terms we could describe as impoverishment, and that is why it is so important to establish a policy of amortization.

One of the meanings of the term amortize presented in the dictionary of the Royal Spanish Academy defines it as the “recovery or compensation of funds that have been invested in a company”, and this leads us to one of the uses it receives in speech everyday, which refers to “having used a product properly”.

Let’s see some example sentences of this last meaning in the popular language: «The truth is that with all these trips we cannot deny that we have amortized the car», «Do not worry about the breakdown, that this device was already more than amortized after from so many years of use ”, “ I know it is a very expensive computer, but it is worth it because I know I will pay for it ”.