Accounting Entry to Amortize Intangible Assets

by John Cromwell, Demand Media

To appropriately record the amortization of an intangible asset, you need to know the useful
life of the item in question, how much it cost to acquire and whether it will have any resale
value after you use it. Once you have that information, you can calculate the average
amortization expense. This annual expense will decrease the value of the intangible asset as
well as overall income each year it is applied.

Intangible Asset
An intangible asset is not a physical thing, but it represents an element of the business that
has value none the less. Corporate attributes such as customer loyalty and rights to produce
products exclusively increase a business long-term profitability but lack the physical form
that equipment or inventory has. An intangible asset is valuable because it represents the
prospect of future sales due to the history of the business. Examples of intangible assets
include goodwill, franchise rights and patents.

Amortization Defined
Amortization is the process of expensing the use of intangible assets over time as opposed
to recognizing the cost solely in the year it is acquired. Many times when a business acquires
something, the amount spent is immediately used to decrease income. When something is
amortized, the acquisition cost is divided by the assets useful life, and that amount is
used to decrease a business income over a period of years. Useful life is a term that
describes how long an asset can be used before it is depleted. Amortization is a common-
sense accounting principle meant to reflect an economic reality. Just as the benefit of long-
term goods such as intangible assets lasts over a period of years, the associated expense of
acquiring that asset should be spread out over the same amount of time.

Related Reading: How Is Amortization Accounted For?

Accounting Standard
American accounting practices are governed by General Accepted Accounting Practices. The
Securities Exchange commission and American Institute of Certified Public Accounts have
declared GAAP authoritative. GAAP is written and maintained by the Financial Accounting
Standards Board, a private organization of accounting experts. The relevant section of GAAP
related to amortizing intangibles is the Statement of Financial Accounting Standards Number
142, Goodwill and Other Intangible Assets.

Calculating Amortization
To calculate the amortization of an intangible asset, you must first determine its useful life.
The useful life is the amount of time the asset is expected to enhance the revenues of the
business. To estimate this amount, the business will consider the expected use of the asset,
legal and contractual provisions related to the asset, and the useful life of business goods
related to the intangible. The next step is to take the value of acquisition for the intangible
asset minus any residual value, or the amount of money you would get back if you sold
the asset after you used it all up. You then divide what remains by the assets useful life to
determine the assets annual amortization expense.

Recording Amortization
To record annual amortization expense, you debit the amortization expense account and
credit the intangible asset for the amount of the expense. A debit is one side of an
accounting record. A debit increases assets and expense balances while decreasing revenue,
net worth and liabilities accounts. A credit is the other side of an accounting entry and
performs the opposite function of a debit. Most importantly in this case, it decreases asset
accounts.

Disclaimer
When preparing financial statements and tax returns, consult with a certified public
accountant. This article does not provide legal advice; it is for educational purposes only.
Use of this article does not create any attorney-client relationship.

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