Intangible assets are rights, privileges, and competitive advantages that result from ownership of long live assets that do not posses any physical substance. Many companies most valuable assets are intangible. Some widely known intangibles are Microsoft's patents. McDonald's franchises, the trade name Ipod, and Nike's trademark "swoosh".
How to do accounting for Intangible assets?
Intangible assets are recorded at cost. Its of two types, Limited life and indefinite life. In Limited life, the company allocated its cost over the useful life of the assets which is similar to depreciation. the process of allocation of such intangible assets is called as Amortization. Indefinite life of intangible assets should not be amortized.
How Amortization is different from depreciation?
In Depreciation a separate account is opened called Accumulated depreciation Account and every year the amount depreciated is credited to that account and it is deducted to the Historical cost of the Gross block of the asset. Whereas in Amortization every year the cost of the assets get reduced and the Book value is shown in the Balance sheet.
Example:
In depreciation, let say the cost of asset is $10000 and depreciation in $1000 /yr
Every year the Accumulate Depreciation Account is credited with $1000/yr.
ie.,
1st year - $1000
2nd year - $2000
3rs year - $3000 and so on till 10th year - $10000. Which means the cost of asset become Zero and a replacement is needed.
Depreciation and Amortization Treatment in Balance Sheet:
In Fixed Assets: Every year the Gross Block of the Asset is shown the Historical Cost ie,. the cost at which the Asset has been purchased and to that the Accumulated depreciation is deducted. So every successive year the Accumulated depreciation account increases and the Book value of the asset Decreases.
Example:
1st year: Gross Block: $10000
Less: Acc Dep: $1000
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$9000
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