Categories: Finance

Amortization

To capitalize upon the opportunities belonging to over the years the companies often fulfill funding requirements through long term debts from banks or financial institutions. These long-standing loans are repaid in yearly installments usually. Annual installments include principle repayments and interest payments both. For the purpose of financial accounting and matching interests over the period to that year revenues the segregation of interest and principle payments is necessary. Interest payment is charged as expense to the income statement and principle payment reduces the liability standing in the balance sheet each year.

This separation of principle and interest is not a simple job rather it requires understanding of loan covenant and financial management including time value of money. Amortization table is constructed to determine the annual installment and disintegration of the installment into principle and interest payments.

The step wise procedure for creation of amortization table is as follows:

• Determine the annual installment payment which is computed through dividing the total amount of loan by the present value interest factor of annuity calculated on the cost of capital.

• A year wise and column wise schedule of payments is constructed where first column shows no of years, second total installment, third loan/principle at the beginning of each year, fourth interest on loan, fifth principal repayment, and sixth loan/principal outstanding at the end of each of year.

• Interest is calculated by multiplying the cost of debt to the opening balance of loan/principal for each year.

• Principal repayment is determined by subtracting the interest payment calculated in step 3 from the total installment.

• Principal outstanding at the end of each year is determined by subtracting principal as calculated in step 4 from the opening balance of the loan each year.

Page: 1 2

kasi

Recent Posts

Porter’s Five Forces of Microsoft

Microsoft Corporation also known as MS is one of the biggest multinational technology-based company in…

2 years ago

Porter’s 5 Forces Analysis of Fast Food Industry

The article is based upon in-depth analysis of Fast Food Industry of Australian Region with…

2 years ago

Apple Inc. – Porter’s Five(5) Forces Analysis

The paper presents detailed overview about the Apple Inc. analysis on the parameters set by…

2 years ago

Marketing Plan – Thomson Holiday Group

The purpose of this research paper is to develop a marketing plan for the Thomson…

2 years ago

Case Study – Jerk Stars Ltd- Sales and Marketing Human Resources Dilemma

1. As applicable to other department managers, a human resources manager invigilates the departments and…

2 years ago

KFC Jamaica – Operation and Services Flow

The purpose of the present article is to formulate a work allocation flow chart of…

2 years ago