Journal entry for license fee

Introduction

In accounting, the license fee that the company pays to obtain the right to use certain property or items from the government or other third party is a type of intangible asset. Likewise, we need to make the journal entry for the license fee by recording the total cost of acquiring the license as an intangible asset on the balance sheet.

And we also need to amortize the cost of the license over its useful life and record it as an expense on the income statement at the period end adjusting entry. The process of amortization of the intangible asset is similar to that of depreciation of tangible asset as we just need to divide the cost by its useful life.

However, there is a bit different for the journal entry of the amortization of intangible assets or the license fee in this case. Specifically, we will directly credit (decrease) the license account upon amortization without having the contra account like that of the tangible asset.

Journal entry for license fee

We can make the journal entry for license fee by debiting the license fee as an intangible asset and crediting the cash account for the total cost of acquiring the license.

If the license has a definite life, we will need to amortize the cost of the license over its useful life and record it as an amortization expense on the income statement at the period end adjusting entry.

Likewise, we can make the journal entry for amortization of the license by debiting the amortization expense account and crediting the license account.

In this journal entry of the license amortization, total assets on the balance sheet will decrease while total expenses on the income statement will increase.

Example

For example, on January 1, the company ABC purchase a license with the cost of $100,000 to operate in area A for 10 years.

In this case, the company ABC can make the journal entry for the license fee of $100,000 by debiting this amount into the license account and crediting the same amount into the cash account

As the license fee is an intangible asset, this journal entry of the license fee will increase total intangible assets by $100,000 as of January 1.

Later, at the period end adjusting entry of December 31, the company ABC can amortize this $100,000 license fee with the 10 years period and record it as an amortization expense on the income statement as below:

This $10,000 comes from the $100,000 cost of the license divided by its useful life of 10 years. Likewise, in this journal entry, total assets on the balance sheet will decrease by $10,000 while total expenses on the income statement will increase by the same amount of $10,000 as of December 31.