Learn Accounting Entries For Amortization On Your Own:

        In accounting, amortization refers to the process of spreading the cost of intangible assets over its estimated useful life. This periodic process of repayment schedule with fixed amount in regular time frame helps in gradually writing off acquired intangible asset like patent, copyright, trademark etc from balance sheet to the income statement of the concern and eventually helps in recoupment of the invested money.

        For an intangible asset that has a finite useful life:

Amortization Expense Under Straight-line Method =Cost of Intangible Asset
Useful Life

If an intangible asset has an unlimited life, then it is still subject to a periodic impairment test.

Impairment test of intangible asset is normally required to done when the fair value of asset abruptly declines than the book value. The process of impairment accounting helps to write off the difference between the fair value and the recorded cost.This would eventually help the management in reducing the book value of intangible asset in the balance sheet.

Journal Entries For Amortization:

Though the process of amortization does not involve actual cash but it is treated as expenditure. The following journal entry needs to be passed

Amortization Expenses A/c ------------Dr.

        To Accumulated Amortization A/c

(Being the amount of amortization charged)

        At the end of every financial year, passing of this journal will eventually reduce the value of an intangible to zero and will enable the firm replace the intangible asset over time.

Explanatory Note:

Here it is to be noted that the amount charged as Amortization Expenses is debited as because it is treated as expenditure and is transferred to Profit and Loss Account.

And by crediting Accumulated Amortization A/c, a Reserve Account is created for specific purpose of replacing the intangible assets which reduces in value as the benefit received from it is utilized over time and at the end of its useful life, the value will be reduced to zero.

For example, EF Pharma has spent 50,00,000.00 to acquire a Patent Right that will expire in five years. This is an intangible asset, and should be amortized over the five years prior to its expiration date. The entry in each year would be:

Amortization Expense A/c------------ Dr. 10,00,000.00

        To Accumulated Amortization A/c        10,00,000.00

End the end of accounting year, the acquired patent will appear in the balance sheet side as follows:

Copyright-cost50,00,000.00
Less: accumulated amortization10,00,000.00
40,00,000.00