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Amortization Table – Definition

Amortization Table or Schedule Defined

An amortization table is defined as a document that shows you how much you are paying each month on a loan.

An amortization table shows the payment schedule which is given when a loan is granted and approved. This is a summary of every payment that is borrowed, which must be made during the lifespan of the loan.

A Little More on What are Amortization Tables

Whenever one acquires a loan it’s important that all the details are known. There are many parts to a loan that should be understood. This includes the interest rate, the term, and the amount of all monthly payments as well as the total which will be paid. This information will allow you to make an informed decision to make sure you are in control of your finances. When you apply for a loan all of this information will be located in a summarized form on an amortization table. In the simplest of terms, this is a depreciation table that shows a breakdown of all payments which must be paid in order to settle the loan. Additionally it will show the dates these payments must be made. When a loan is acquired it is necessary to pay any interest for this money, unless there is an interest free period.

Amortization tables are tools that allow you to understand more information about your loan. You should take advantage of these useful tools. Why? This is because mostly the loans are medium or short term. The information in an amortization table allows you to know exactly what your payment each month will be to help you settle your debt and what percentage goes into the interest.

When you have a loan and feel like the debt doesn’t seem to be decreasing or that the payments you are making are not making a differences, you can check the amortization table to help you better understand the status of the loan.

There are a few different types of amorziation tables. The most common of them is known as the French method. What does this method consist of? The way the information is presented in this method is really simple. This is because the monthly payment does not change, every month it will remain the same. What does change is the percentages which are allocated to the debt and interest. When you pay more monthly the amount paid will allow the debt to become smaller and the interest will decrease as well.

You have already seen how using an amortization table can help you to better manage your finances when it comes to taking control of your loan, but they are also useful for other things. Consider this scenario, you are ready to buy a house and start looking for various options to learn which bank you could acquire a reasonable mortgage from. When you make a request for the information, it’s likely you will receive all vital information through an amortization table. This can help you to compare between the different options and choose the one that is best for you. According to your situation and financial goals, an amortization table can help. A detailed amortization table consists of five different columns.

The first column of the table is the period. Each period is in reference to when the payment must be paid.

The second column is called interesting. This is where the interest of the loan paid to the lender in each period is seen. This is calculated by multiplying the interest rate and the balance. The interest can be either variable or fixed.

The third column is amortization of capital. This consists of the repayment of the loan without any interest. This is what is taken from or deducted each period repayment off the outstanding balance.

The fourth column is the capital of the loan which is pending in amortization. To calculate this the outstanding capital and the amortization are then subtracted.

The repayment of loans can be completed in a few different ways. The most common are:

  • Through the constant capital amortization. The fees which must be paid each time will be lower because the interest is lower over time. This is also known as the French method or Progressive method.
  • Through constant quota. This is when the fee that must be paid remains the same while the amortization of the loan is decreased at the beginning and larger at the end.
  • Through a constant capital amortization (the third column, as in the graphic example). The fee to pay each time is lower since the interest is lower as time passes. It is also known as the French method or progressive (quota) method. This is the most common method for paying a fixed rate mortgage.
  • Through what is known as a single amortization. The end of the loan which is known as the American method. This is when the interest paid during the life of a loan and also at the end of the loan. An example of this is when the interest and principal of bonds is paid.

An amortization table also may have different implications depending on the interest rate.

  • If the interest is fixed, the amortization table is definitive and real from the beginning. The payment table which is established when the loan is granted is then applied
  • If the interest rate is otherwise variable, the amortization table is just a simulation. This means it is a forecast of payments but will not show the final payment tables because the interest rate begins to change over time.

Financial institutions must provide all of this information to you as a customer, this is a requirement. When a loan has a fixed interest rate, it’s important to request this information at the beginning of your loan period, since it will not change over time. When the interest rate is variable, the amortization table will also vary so you will want to continue to request it periodically throughout the loan period.

The amortization table refers mainly to the repayment of the loan, as we defined previously. But this type of concept can also be used for any other type of amortization. Many companies will often establish the amortization on their fixed assets to help determine the life of various elements.

Amortization tables are useful pieces of information when you are working with loans. You can think of them as a crystal ball that allow you to see the future of your loan and understand how your credit will change over time with the payments of the loans.

References for Amortization Table

Academic Research for Amortization Table

•    Goodwill amortization and the usefulness of earnings, Jennings, R., LeClere, M., & Thompson, R. B. (2001). Financial Analysts Journal, 57(5), 20-28. This document refers to the financial amortization and the usefulness of having this financial and earnings data to indicate the share value for larger publicly traded companies over the period of 1993-1998. The only issue with this is that the Financial Accounting Standards Board recently adopted new accounting standards that work to eliminate the systematic amortization of all goodwill to favor the requirement which reviews goodwill for any impairment. It was found the earnings before this goodwill amortization period explain more when observed distribution of all share prices over earnings after the goodwill amortization occurs. This Is when the share valuations are then only based on the earnings alone. Goodwill amortization only adds some noise to this process. The results then suggest that this eliminates goodwill amortization from the collaboration of net income. This will not reduce the usefulness to any investors and other analysts to indicate the share value.

•    The capitalization, amortization, and value-relevance of R&D, Lev, B., & Sougiannis, T. (1996). This document shows that the GAAP mandate the full expenses of the R&D in the various financial statements presume that because of all these concerns the reliability and objectivity as well as the value-relevance of R&D capitalization. In order to address these concerns it is estimated that the R&D capital of a larger sample of many public companies reviews these estimates and finds them to be statistically reliable as well as economically meaningful. The reported earnings are then adjusted to show value-relevant numbers to the investors. It is documented to showcase significant intertemporal association between the firms with R&D capital  and all subsequent stock returns. This suggests a systematic mispricing of all shares of R&D intensively companies as well as compensation for extra market risk factors which are associated with R&D.

•    Determinants of goodwill amortization period, Hall, S. C. (1993). Determinants of goodwill amortization period. Journal of Business Finance & Accounting, 20(4), 613-621.In this study it is investigated whether there are economic consequences that have an effect on the time and length of the goodwill amortization. It is found that there is a significant relationship in the size of the firm and the overall amortization period. It also shows that the firms which are included in the sample size are those that report debt covenant restrictions which is dependent on their goodwill accounting. The evidence of this length of the amortization period for the goodwill is related to the firm’s overall leverage.

Valuation and amortization, Preinreich, G. A. (1937). Valuation and amortization. Accounting Review, 209-226. This document shows the difference between valuation and amortization in terms of accounting.

•    Rates of amortization of advertising expenditures, Peles, Y. (1971). Journal of Political Economy, 79(5), 1032-1058. In this journal we will discuss the measures of the effect of advertising expenditures on the sales of a firm in three industries. These industries include cigarettes, beer and even new passenger cars. The yearly rate of amortization of these advertising expenditures are around 40-50% for beer and 35-45% for cigarettes. This advertising effect is explained in two different nondurable industries by the exponential lag model. The two different lag variables in their firms own advertising according to that of their competitors. With respect to the automotive industry the increasing in sales in advertising and the return have a negative effect on all future sales.

•    How informative are earnings numbers that exclude goodwill amortization?, Moehrle, S. R., Reynolds-Moehrle, J. A., & Wallace, J. S. (2001). This article discusses how informative earning numbers truly are when they exclude goodwill amortization. In the original draft the Financial Accounting Standards board proposed companies be allowed to offer a report for a second per share of earnings numbers which exclude goodwill amortization. They also proposed that goodwill is not amortized at all. Instead, it is simply written down when impaired. In the study the information is based on content of earnings which include amortization or other intangible relative to the two different traditional performance measures. Earnings that are before extraordinary items and the cash flow from these earnings. These findings then suggest that goodwill amortization weren’t really a good decision and the support is then in favor of the FASB’s revised position and standing.

A spreadsheet template for installment loan amortization tables, Wampler, B. (2000). The CPA Journal, 70(5), 82. This document is a spreadsheet which offers a template for the installment loan amortization tables. It helps to showcase and example of how well these tables work.

•    Is the Truth in Lending Being Told with the Annual Percentage Rate as the Measure of the Cost of Credit?, Celec, S. E. (1981). This document discusses how the truth in lending is being told with its annual percentage rates and if this is a measure of the cost of credit. This paper then goes on to demonstrate and discuss the APR (Annual Percentage Rate) which measures the requirements under the Federal Reserve System. The APR is not a correct way to measure the true cost of credit. It is noted that this is the only correct cardinal measure under the restrictive conditions. The Annual Effective Rate is required as a summarized measure of the true cost of credit for all types of loans.

Interest on Investments, and Amortization of Premiums Paid and Accumulation of Discounts Allowed Thereon, Vierling, F. K. (1920). Louis L. Rev., 5, 134.ums  This article discusses how the interest on investments and the amortization of premiums are paid and the accumulation of discounts are allowed.

•    Has goodwill accounting under SFAS 142 improved financial reporting?, Chambers, D. J. (2007). This article takes a more in depth look at the question of if goodwill accounting under the SFAS 142 has improved overall financial reporting. The SFAS 142 made two very significant changes to the process of goodwill accounting. The first was when firms were required to test yearly for goodwill impairment. Secondly, the firms are then prohibited from a systemic amortizing goodwill. In this study, the changes resulted in an improved financial reporting system, as it was predicted by the FASB. Then evidence was found that yearly testing and impairment testing improves the financial reporting. However, there is also evidence that the removal of the systematic amortization reduces the quality of the financial reporting system. Additional analysis is demonstrated that the goodwill accounting system which allows for both yearly impairment testing and even systemic amortization. It allows the firm to choose a firm specific mix of each within discretion and provides the most relevant accounting numbers for goodwill accounting.

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