Accumulated Amortization of Assets
Accumulated Amortization definition
To understand the accumulated amortization of assets, it must be understood that the assets in question are intangible in nature. These assets are usually long-term and are not physical in nature. Accumulated amortization is achieved through the reduction of the intangible account lump sum incrementally. Over the life of the asset in question, amortization is usually calculated in a constant incremental fashion for a maximum of 40 years. The accumulated amortization of assets is recorded directly against the total asset account, much like the accumulated depreciation is written off 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, which grants the owner exclusive privileges to production over a long-term period of time. Secondly, there are copyrights that 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). Thirdly, there are licenses that give an organization or person the right to perform a certain act or sell a certain product. Finally there are leaseholds that are payments to ensure that an asset will be sold from a lessor. All of these examples are amortized in accordance with their amortization rate and how long the agreement actually lasts.
Accumulated Amortization Calculation
Now that the types of accounts that are amortized are known, it makes sense to observe a particular example of accumulated amortization in terms of a real world situation. Let us say that Burger King wants to patent a new breakfast pancake sandwich called the “flopper.” The 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, a separate debit must be recorded as “amortization expense” for the patent, matched 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 and divide it by the number of years that it will be used for (in this case $100,000/yr).