How to Calculate the Amortization of Intangible Asset

by Cynthia Gaffney ; Updated April 19, 2017
Trademarks provide intangible asset value to a company.

Intangible assets include trademarks, patents, copyrights and trade names. Another common intangible asset is the remaining value of an acquired company that cannot be assigned to any physical, or tangible, asset. These intangible assets provide value to a firm in certain ways, and become used up systematically over a set number of years, similar to the concept of depreciation for tangible assets.

Step 1

Determine which assets to amortize. Review a company's balance sheet, or if available, a detailed listing of assets. Only choose intangible assets with a defined useful life.

Step 2

Determine the cost basis, or original cost, for each intangible asset. Many intangible assets that meet the requirements for amortization are purchased from another company. Generally, costs related to internally generated intangible assets must be expensed as the business incurs them, rather than amortized. Locate any legal contracts or purchase agreements that document the acquisition costs for each intangible asset. Consider any related legal fees from the acquisition as part of the purchase price of the intangible asset, and include them.

Step 3

Determine the useful life of the intangible asset. This is defined by the Internal Revenue Service in Publication 535 as a maximum of 15 years for most intangibles, unless the useful life is dictated by legal terms. Patents, for example, have a legally defined life of 17 years, which may exceed their useful life. You must choose the shorter of the two, and amortization periods can never exceed 40 years.

Step 4

Calculate the amortization by month. Companies must use the straight-line amortization method, unless the IRS accepts their reason for using another method. The straight-line method requires the total cost of the asset to be divided by the number of monthly periods in its determined useful life. Each month the appropriate amount of amortization is expensed on the income statement.

Step 5

Record the transaction in the general journal. In the accounting books, an accountant debits, or increases amortization expense, an income statement account. He offsets this entry in one of two ways. Either he credits, or increases the accumulated amortization contra-account, or he directly credits, or decreases, the intangible asset balance account. Both of these accounts reside on the balance sheet. The accumulated amortization contra-account works as a deduction from the intangible asset's balance on the balance sheet.

Step 6

Check your calculations. Verify that only one period of amortization expense shows on the income statement. Check the balance sheet to make sure the accumulated depreciation account balance or remaining intangible asset balance reflects the correct number of remaining months or years left to amortize.

Tips

  • According to Financial Accounting Standards Board (FASB) no. 142 guidance, certain intangible assets may not be amortized if their useful life is indefinite. For example, a patent that contains renewal provisions may qualify as an indefinite life.

References

About the Author

Cynthia Gaffney started writing in 2007 and has penned tax and finance articles for several different websites. She brings more than 20 years of experience in corporate finance and business ownership. Gaffney holds a Bachelor of Science in finance and business economics from the University of Southern California.

Photo Credits

  • PhotoObjects.net/PhotoObjects.net/Getty Images
bibliography-icon | raiffeisen-cards.ru icon for annotation tool Cite this Article

Related pages


florida f-1120overnight index swapblock cold callers14k 585calculate forward exchange ratedetachable homesupside down on auto loanwalmart check cashing feesarvest debit cardsgross margin variancemichigan state tax refund statuspartycheap couponswhen does revenue recognition occurky food stamps income limitflat tax pros and consmy car got repossessed can i get it backwomens shelter donationscalculate monthly credit card paymentsmarket premium capmillinois withholding tableschapel rock christian church indianapolis inmortgage cosigner dieshow to calculate declining balance methodwhat does geha stand fornursing scholarships for women over 40texas adverse possessionhow to calculate dividend payouthail damage car insurance claimcan you write off closing costs on taxesmoneypak reloadwhat can you buy with calfreshsection 8 hud homeshow to spell prescriptionnetspend routing and account numberhow to withdraw cash from atm machinesample of hardship letterw4 form sample for marriedcharacter reference letter example for friendeasement agreement definitionoklahoma quit claim deed form freewhen do hard inquiries fall off credit reportw2 form box 14 codesfica vs federal withholdingwhat does irs mileage rate coverannie mae homepath propertystudent loans divorcesingle member llcssprint pay cell phone billwill medical insurance cover dental implantsunion dues tax deductibledo hoa board members get paidcustomized debit card bank of americacan you do your taxes with your last pay stubgeorge pullman inventedgwinnett county appraisal districtmaricopa county recorders officefairfax county divorce recordsmassachusetts lottery taxnada black book trade in valuepenalty for taking out 401k money earlyhigh yield credit spreadsproperty valuation approachesdefine promissory notesmutual fund turnover ratiois a pell grant a loanprweb couponsdebit life insurance companiesaddendum to last will and testamenthow to find out if a property is fha approvedwidowed spouse social security benefitslong beach school uniformshow to find out how much i owe irscan i print my own deposit slipsconventional loan appraisal guidelinescell phone surcharges

Related pages


florida f-1120overnight index swapblock cold callers14k 585calculate forward exchange ratedetachable homesupside down on auto loanwalmart check cashing feesarvest debit cardsgross margin variancemichigan state tax refund statuspartycheap couponswhen does revenue recognition occurky food stamps income limitflat tax pros and consmy car got repossessed can i get it backwomens shelter donationscalculate monthly credit card paymentsmarket premium capmillinois withholding tableschapel rock christian church indianapolis inmortgage cosigner dieshow to calculate declining balance methodwhat does geha stand fornursing scholarships for women over 40texas adverse possessionhow to calculate dividend payouthail damage car insurance claimcan you write off closing costs on taxesmoneypak reloadwhat can you buy with calfreshsection 8 hud homeshow to spell prescriptionnetspend routing and account numberhow to withdraw cash from atm machinesample of hardship letterw4 form sample for marriedcharacter reference letter example for friendeasement agreement definitionoklahoma quit claim deed form freewhen do hard inquiries fall off credit reportw2 form box 14 codesfica vs federal withholdingwhat does irs mileage rate coverannie mae homepath propertystudent loans divorcesingle member llcssprint pay cell phone billwill medical insurance cover dental implantsunion dues tax deductibledo hoa board members get paidcustomized debit card bank of americacan you do your taxes with your last pay stubgeorge pullman inventedgwinnett county appraisal districtmaricopa county recorders officefairfax county divorce recordsmassachusetts lottery taxnada black book trade in valuepenalty for taking out 401k money earlyhigh yield credit spreadsproperty valuation approachesdefine promissory notesmutual fund turnover ratiois a pell grant a loanprweb couponsdebit life insurance companiesaddendum to last will and testamenthow to find out if a property is fha approvedwidowed spouse social security benefitslong beach school uniformshow to find out how much i owe irscan i print my own deposit slipsconventional loan appraisal guidelinescell phone surcharges
"].join(""));l.close()}catch(m){b.src=a+'d.write("'+loaderHtml().replace(/"/g,String.fromCharCode(92)+'"')+'");d.close();'}b.contentWindow.config=k;b.contentWindow.SCRIPT_ID=g},0)}}}(); window.usabilla.load("w.usabilla.com", "4a73c8c43a12"); /*]]>{/literal}*/