Straight line amortization is a method for charging the cost of an intangible asset to expense at a consistent rate over time. This method is most commonly applied to intangible assets, since these assets are not usually consumed at an accelerated rate, as can be the case with some tangible assets. The formula for calculating the periodic charge under straight line amortization is:
For example, a business has bought a patent for $10,000 and expects to sell it off to another business in four years for $2,000. The calculation of its straight line amortization charge is:
($10,000 Patent book value - $2,000 Expected salvage value) ÷ 4 years
= $2,000 Amortization per year
Straight line amortization is the same as straight line depreciation, except that it applies to intangible assets, rather than tangible assets.
The term can also be applied to the repayment of a loan via a series of periodic payments that are in the same amount. Each of these payments includes an interest and principal component. Early in the series of payments, the bulk of the payments are comprised of interest charges, with modest principal repayments. As the principal repayments gradually reduce the outstanding amount of the loan, the proportion of interest expense in each successive payment declines, allowing for an increased proportion of each payment to be assigned to principal.