Amortization is the decrease in value of an intangible asset or assets over time
Amortization is an accounting term used to rectify the cost of intangible assets with the decrease in value over their useful life. Typically, amortization is used to devalue intellectual property, patents, or copyrights whose value has a limited life-span. It is reported as an expense on the income statement (usually as "amortization" though often lumped together with depreciation or sometimes in an overarching category like "other"). However, since it is a non-cash expense, amortization is never actually paid for (no cash changes hands) and, as such, is added back to the total cash from operating activities on the cash flow statement. Thus, amortization actually increases a company's free cash flow while decreasing earnings.
While in theory amortization is used to account for the decreasing value of acquired or developed intangible assets (for example, a new, patented, process for refining crude oil) in practice amortization is often used to spread the payment of one-time expenses over several years, generating a higher net income by reducing expenses on the income statement. By contrast, a highly profitable company looking to decrease their tax payments may list what should typically be an amortized expenditure as a one-time expense on the income statement, reducing their net income for the year and thus decreasing the amount of money owed for taxes.
Amortization is similar to depreciation in that the value of the asset or liability is reduced over time. The key difference is that depreciation refers to tangible assets, like machinery or buildings, while amortization refers to intangible assets such as patents.
Amortization is also a key component of EBITDA, or "Earnings Before Interest, Tax, Depreciation, and Amortization".