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How to Record Intangible Assets on a Company's Balance Sheet
Introduction to Intangible Assets
Intangible assets are those items that an organization will not be able to touch or see, yet still derive value from it. In accounting terminology, these items incorporate products that deliver rights or privileges to a company. Examples include patents, copyrights, or rights-to-use arrangements with other parties regarding a specific asset. Though an intangible asset may have a piece of paper that exists to describe or detail the item, the document does not really represent the possession itself, at least in terms of the item’s worth or value. Reporting intangible assets is essential for a company, which should record the intangible asset on its balance sheet, under the long-term asset category in most cases.
Steps to Record Intangible Assets
1. Tally the total cost for the intangible asset. This should incorporate the purchase charge for the intangible asset and any associated costs to secure the rights and/or benefits of the asset.
2. Post the total intangible asset cost into the general ledger. Debit an appropriate asset account and credit either an accounts payables or cash account, based on exactly how the business paid for the resource.
3. Make a line on the company’s balance sheet for the intangible asset. Supply a one-line summary of the intangible possession, such as patent, goodwill, or copyright. The account description label may need to match the one line balance sheet description line.
4. Determine annual amortization for the intangible possession. Divide the possession's absolute cost by the number of useful years the asset delivers worth to the company. Review appropriate accounting principle guidelines from authorities to ensure the amortization amount is appropriate.
5. Create a journal entry to post the yearly amortization into to the basic general ledger. Post a debit to an amortization expense and then credit the accumulated amortization account, all in one entry. Accountants can complete this activity on a monthly basis if desired.
6. Report all accumulated amortization straight underneath the intangible asset account on the balance sheet. This is a contra account that decreases the original value of the intangible asset, creating a true carrying value for the intangible item.
Notes & Reminders
Intangible assets can go into one financial account together or grouped by the particular type of intangible asset. As an example, one account may be essential for all patents, with each patent having their an individual amortization estimate.