Intangible assets are those items that individuals in a company cannot feel or see. In accounting terms, these include items that provide rights or privileges to a company. Examples include patents, copyrights or right-to-use contracts. Though a piece of paper exists for the item, it does not truly represent the asset itself, in terms of value brought by the item. Reporting intangible assets is necessary on a company’s balance sheet, under the long-term assets section.
Compute the cost of the intangible asset. This includes the acquisition cost and any associated fees to secure the rights and privileges of the item.
Post the total cost into the general ledger. Debit an asset account and credit payables or cash, depending on how the company paid for the asset.
Create a line on the balance sheet for the asset. Provide a one-line description of the intangible asset, such as "patent" or "copyright."
Calculate annual amortization for the intangible asset. Divide the asset’s total cost by the number of useful years the asset will bring value to the company.
Post the annual depreciation into the general ledger. Debit amortization expense and credit accumulated amortization.
Report accumulated amortization directly below the intangible asset account on the balance sheet. This is a contra account that reduces the historical value of the intangible asset, creating a carrying value for the item.
Intangible assets can go into one account together, grouped by type. For example, one account is necessary for all patents, with each patent having its own depreciation calculation.
- "Intermediate Accounting"; David Spiceland et al.; 2007