Jenny owns a bakery that makes hot cross buns. She purchased a delivery van to deliver her buns to local restaurants. She pays $300 each month for her loan payment on the van. This payment is an example of:

Question

Quizplus · Accepted Answer

The loan payment is an amortization. Amortization is the elimination of a liability through gradual payments.
Key Takeaway: Amortization is a gradual reduction of an amount over a period of time. A loan is a liability and the loan payment reduces the liability. Amortization also occurs with assets that have a limited life. The gradual reduction that occurs in that instance is depreciation, where the debit amortization expense is debited and the asset itself is credited.

Jenny Owns a Bakery That Makes Hot Cross Buns