How to Amortize Intangible Assets

Amortization is the process in which we decrease the value of intangible assets like depreciation is the decrease in the value of tangible assets. There are two benefits of amortization of intangible asset. One is : it will help to show the correct current value of intangible asset. Second is : amortization funds will help to replace the old intangible asset.

Following is the Simple formula of Amortization of Intangible Asset Per Year

  • Initial cost of intangible asset = Buying cost + Other Direct Cost for Buying Such Intangible Asset 
  • If there are more than one intangible asset, we will calculate each intangible asset's per year amortization value. 
  • We do not calculate the amortization  the value of goodwill, brand and logo because these intangible assets life is unlimited. We can not determine their useful life. We also do not calculate the amortization value per year for tangible asset in this category because we have to calculate depreciation other long term tangible assets. 
  • We can calculate the amortization value per year for patent, copyright, trademark and other intellectual property rights like business license. 

Example : M/S Rahul and Publishers Company has the copyrights on 1000 books which it has bought by paying Rs. 40,00,000 for 20 years. So, Amortization value of copyrights per year will be

= Initial Costs of Copyrights / Useful life of copyrights

= 40,00,000 / 20 = Rs. 2,00,000

Every year, value of copyright intangible asset will decrease will amortization value of Rs. 2,00,000. If have saved same from our every year income, it means at the end of 20 th year, we have enough fund to buy new copyrights for next 20 years. 

Important to Know : 

  • In some organisations, there will not any differentiate of amortization and depreciation because formula of amortization is just same as straight line of depreciation. 
  • If we have more than one intangible asset, we will calculate each's amortization value and then we will do gross total of amortization value of different asset per year. 

Related : Amortization of Bond Issue Cost 


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Accounting Education: How to Amortize Intangible Assets
How to Amortize Intangible Assets
Accounting Education
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