Straight line discount amortization defines a method for allocating a discount on a loan or investment over its lifetime. For instance, if a company issues a bond with a face value of $1,000 and sells it for $950, the $50 discount is amortized over the life of the bond, reducing the carrying value on the company’s balance sheet.
Straight line discount amortization is commonly used because of its simplicity, providing a consistent reduction in carrying value. The concept has been used for centuries, with a significant development in the 19th century when accountants began applying it to bond valuation.