Monday, June 6, 2011     17:19
 

Frequently Asked Question

1. What is an amortization schedule?
The procedure of repaying a loan with interest to the lender is described in an amortization schedule. Each payment is broken down in terms of how much is applied to the principal and how much is interest. The distribution between principal and interest varies over time so the amortization schedule exactly illustrates the changes.

2. What is the difference between amortization and depreciation?
Since very few assets last forever, one of the main principles of increase accounting needs that an asset's cost be proportionately expensed based on the time period over which the asset was used. Both depreciation and amortization are methods that are used to prorate the cost of a particular type of asset to the asset's life. It is important to mention that these methods are calculated by subtracting the asset's salvage value from its original cost.
Amortization usually refers to spreading an intangible asset's cost over that asset's useful life. For instance, a patent on a piece of medical equipment usually has a life of 17 years. The cost involved with creating the medical equipment is spread out over the life of the patent, with each portion being recorded as an expense on the company's income statement.
Depreciation, on the other hand, refers to prorating a tangible asset's cost over that asset's life. For instance, an office building can be used for a number of years before it becomes run down and is sold. The price of the building is spread out over the predicted life of the building, with a portion of the cost being expensed each accounting year.

3. Why is one line in the amortization schedule highlighted?
This line indicates the cross-over point for the payment schedule, the point in the amortization when the principal part of the payment exceeds the interest part of a payment for the first time. Not all schedules will have a cross-over point, though most characteristic mortgage amortizations maybe will. 

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