Accumulated Amortization of Assets Definition
To understand the accumulated amortization of assets, understand that the assets in question are intangible in nature. These assets are usually long-term and are not physical in nature. Achieve accumulated amortization through the reduction of the intangible account lump sum incrementally. Over the life of the asset in question, calculate amortization in a constant incremental fashion for a maximum of 40 years. Record the accumulated amortization of assets directly against the total asset account, much like you would write off the accumulated depreciation as Contra Asset Account in the actual account balance. No accumulated amortization account is necessary.
Accumulated Amortization Examples
It is important to note that the accumulated amortization of assets is generally limited to certain long term assets when it comes to Accounting Principles.
First, there are patents; patents grant the owner exclusive privileges to production over a long-term period of time.
Then, there are copyrights. Copyrights give the owner the right to reproduce a product for a period of time. There are also trademarks that are the “faces” of a company for years (e.g the “whopper” for Burger King).
Finally, there are licenses that give an organization or person the right to perform a certain act or sell a certain product. There are leaseholds that are payments to ensure that an asset will be sold from a lessor.
Amortize all of these examples in accordance with their amortization rate and how long the agreement actually lasts.
Accumulated Amortization Calculation
Now, you know the types of accounts amortized. So, observe a particular example of accumulated amortization in a real world situation.
For example, Burger King wants to patent a new breakfast pancake sandwich called the “flopper”. Burger King wishes to purchase a patent on the sandwich for $500,000. The company believes that the patent is going to be useful for 5 years. The regular journal entry for the patent is simple with a debit to the patent matched with a credit to cash. In order to correctly amortize the patent, record a separate debit as “amortization expense” for the patent. Then, match it with a credit that matches with the debit for the patent recorded earlier.
To determine the amount for the patent, simply take the amount required to purchase the patent. Then divide it by the number of years used for (in this case $100,000/yr).