TLDR:
Amortization is the process of gradually writing off the initial cost of an intangible asset over its useful life (in accounting) or paying off a loan through scheduled payments over time (in finance).
Amortization in Finance
A loan amortization schedule shows the breakdown of each payment into principal and interest over the loan term. Early in the schedule, payments are predominantly interest; over time, the principal portion grows. Understanding the amortization curve matters for cash-flow planning, prepayment decisions, and assessing whether a loan structure (e.g., interest-only periods, balloon payments) suits the company’s profile.
Amortization in Accounting
Intangible assets like patents, trademarks, and software are amortized over their useful lives, similar to depreciation for tangible assets. Under IFRS and GAAP, the useful life is determined by economic factors (technological obsolescence, contractual terms, market dynamics) rather than purely legal terms. Goodwill is generally not amortized but rather tested annually for impairment.
Why It Matters for Startups
Amortization affects both reported earnings and tax position. Startups with significant capitalized software development costs or acquired intangibles may see meaningful amortization expense flowing through the P&L, depressing reported margins even when cash generation is strong. Investors typically focus on EBITDA — earnings before interest, taxes, depreciation, and amortization — to evaluate operating performance independent of these non-cash items.