Journal Entry for Amortization of Intangible Assets

Amortization of intangible assets is the accounting process that reduces the value of intangible assets over their useful life. It is the process of allocating the assets’ cost from balance to the amortization expense on the income statement. It is the same as depreciation but for intangible assets.

Intangible assets are assets that lack physical substance but they under the company control. They expect to generate economic benefit for the company for more than one accounting period. These assets owned by the company which incurs from the past events include purchase or self-made.

Intangible assets include computer software, patents, franchise, and so on. It excludes monetary assets such as marketable security, investment in bonds or shares, and other contractual rights. These intangible assets are not going to last forever. The software will be out of date and become useless. The patent and franchise will run to the expired date which requires additional pay to extend.

Due to these reasons, the intangible assets will decrease the value to a specific date. It sounds similar to the depreciation of fixed assets. Amortization expense is the same as depreciation but is used for intangible assets only. It is the process of reducing intangible assets from balance sheet to income statement.

Journal Entry for Amortization of Intangible Assets

When the company amortizes the intangible assets, they simply reduce the balance of the assets over its lifetime which know as useful life. It is the pre-estimated time which the company can generate future economic benefit from the assets.

The recording will reduce the intangible balance by increasing the accumulated amortization which is the contra account. When the accumulated amortization increase, it will net off the intangible assets cost and decrease the netbook value balance.

The journal entry is debiting amortization expense and credit accumulated amortization.

The transaction will increase amortization expense and increase accumulated amortization which is the contra account of intangible asset.

Journal Entry for Amortization of Intangible Assets Example

ABC operates as a holding company. The managements have purchased the franchise from a famous restaurant cost $ 120,000 for two years on 01 March 2022. ABC prepare the financial statement every month. Please journal entry for amortization of intangible assets.

The purchase of franchise is considered an intangible asset’s acquisition. ABC need to record the intangible asset on balance sheet. However, it only last for two years, 24 months. By the end of second year, the value will be zero.

So ABC needs to amortized the franchise for 24 months to allocate the expense equally to each month.

Amortization expense = $ 120,000/24 months = $ 5,000 per month

The journal entry is debiting amortization expense $ 5,000 and credit accumulated amortization $ 5,000.

The amortization expense will increase $ 5,000 on the income statement. It also increase the accumulated amortization $ 5,000. As it is the intangible assets contra account, it will decrease the net book value of intangible assets