Even though intangible assets lack physical existence, they still provide long-term benefits to a company and contribute to its earnings capabilities. For example, patents, trademarks, brands and copyrights all add value to a company and are important in the company's ongoing operations. Journalizing intangible assets is much like journalizing a physical, depreciable asset. With intangible assets, however, you use a process called "amortization" to allocate its expense. Two major classifications of intangible assets are most often journalized: those that have a limited life, such as patents, and those considered to have an indefinite life, such as trademarks.
Journalizing Limited-Life Intangibles
Total the cost of acquiring or purchasing the intangible asset. If you purchased a patent, trademark or franchise license from another party, for example, the total cost equals the purchase price of the intangible. If you registered a patent or copyright, the cost equals the amount you paid for registration, documentation and legal fees associated with acquiring it or defending the patent or copyright against the unlawful use by others.
Determine the asset's amortization period, the number of years over which the intangible reduces in value. The amortization period equals the shorter of the asset's useful life or its legal life (not to exceed 40 years). For example, while a copyright has a legal life of 70 years beyond the death of the creator, its useful life is usually much shorter. If you purchased a patent that's already five years old, you'll have a maximum amortization period of 15 years.
Make a new journal entry on the date you acquired or purchased the intangible asset. Debit the intangible asset account for the total amount for which you acquired or purchased it. Credit "cash" for the same amount, assuming you paid for the intangible with cash.
Divide the cost of the asset by the number of years in its amortization period to calculate the amortization expense for a single year. Debit the "Amortization Expense" account and credit the intangible asset's account for this amount to journalize the amortization expense at the end of a fiscal year.
Journalizing Indefinite Life Intangibles
Calculate the amount for which you acquired or purchased the intangible. For example, the amortizable costs for a trademark, trade name or brand name include expenses associated with securing and defending it. The intangible "goodwill" refers to the asset created when you purchase a company that results from factors, such as reputation and product quality. To calculate goodwill, subtract the company's liabilities from the fair market value of its assets, and subtract the result from the purchase price.
Journalize the acquisition of the indefinite life intangible asset. For example, assume you purchased a domain name for $50,000 or acquired goodwill in a business for $100,000. Debit the "Domain Name" account for $50,000 or "Goodwill" account for $100,000. Credit "Cash" for an equal amount.
Evaluate periodically, such as every one to three years, the intangible asset for impairment. Determine by how much, if any, the asset is impaired. For example, assume you evaluated the fair market value of the $50,000 domain name you purchased to only be equal to $25,000. Or perhaps you estimated that the $100,000 in goodwill you acquired when you purchased the company has been impaired $35,000.
Make an adjusting journal entry to reflect the impairment. Debit a "Loss" account and credit the intangible asset equal to the impairment amount. Using the previous goodwill example, for instance, debit "Loss from Impaired Goodwill" for $35,000 and credit "Goodwill" for the same amount.
After you create the journal entries, post all entries to their respective ledger accounts.