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An amortization schedule shows how each payment on a loan is split between principal and interest, and gives the exact amount remaining on the loan after each payment. It is used to account for compound interest over time and has five columns: time period, balance, payment, interest, and principal paid. Different types of depreciation use an amortization schedule.
An amortization schedule is a table detailing the amount of each payment assigned to principal and interest. Each payment made on a loan is split between principal and interest. An amortization schedule gives you the exact amount remaining on a loan after each payment.
Amortization schedules are used in financial institutions to determine the amount remaining on a loan at any one time. The schedules are created for ease of use, but the actual formula for determining the depreciation of an item is as follows:
A = interest X principal X (1 + interest) number of periods
(1 + interest) number of periods – 1
If the program uses monthly payments, the interest rate used is the annual interest rate divided by 12. The value for the number of periods is the number of periods periods 12. Amortization schedules are used with long-term debt, such as mortgages, auto loans and personal loans.
The purpose of an amortization schedule is to account for compound interest over time. The amount of interest paid is recalculated after each payment, as the principal amount will be reduced by a portion of the payment. This method results in less interest being paid over the life of the contract, as the principal decreases with each term.
An amortization schedule has five columns: time period – months or years – balance, payment, interest and principal paid. The outstanding balance is the full value of the loan, less the amount of payments received.
The payment amount is the entire amount paid in each period. The value in the interest column is the portion of the payment that is allocated to interest. The value in the main column is the portion of the payment assigned to the loan payment.
The purpose of an amortization schedule is to provide a clear accounting for how much of each payment is going towards principal and the total amount owed on a loan at any one time. In any loan, a large part of the payment is allocated to interest. Over time, the full amount of interest on the loan is paid and the amount paid on principal increases.
There are several types of depreciation that use an amortization schedule. Some examples are straight line, declining balance, annuity, or negative depreciation. Depreciation is very similar to depreciation, just the inverse. In an amortization schedule, the first payment is made a period from the date the loan is granted. It could be a year later or a month later. The last payment on a loan is usually lower than the other payments.
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