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Amortization is a way of gradually reducing the value of a loan or intangible asset over a specific time period. It is used to spread out loan payments or expenses related to intangible assets, like patents or trademarks, so that businesses and investors can better understand and plan for their costs. 

With loans, it helps determine how much of each payment goes towards interest and principal, and with intangible assets, it reflects how much value has been used up over time.

Main Points:

  • It helps businesses and investors forecast costs and understand the proportion of interest and principal in loan payments.
  • Amortizing intangible assets reduces taxable income and provides a more accurate representation of a company's true earnings.
  • Intangible assets, like trademarks and patents, have a limited useful life and may lose value over time.
  • Amortization is different from depreciation, which applies to tangible assets subject to wear and tear, such as equipment or buildings.

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