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Accounting for Intangible Assets

Intangible asset is defined as an asset that is not physical in nature or can call as untouchable. Corporate intellectual property like trademarks, patents, copyrights, business methodologies and other than that goodwill and brand recognition are all the common intangible assets taken in today's marketplace or environment. 

Classification

An intangible asset can be either indefinite or definite which depends on the details or specifics of that asset. A company brand name or trade name is considered to be as indefinite asset, as it remains with the company as long as company continues its operations. On the other hand, if a company enters into a legal agreement regarding its patent having no plans of extending the agreement, then it would have a limited life and would be considered as a definite asset.

Accounting Process

As the depreciable assets and natural resources accounted by the company, in the same way companies also account for intangible assets. The cost of intangible assets is thoroughly allocated to expense during the asset's full life or useful life or legal life, whichever is shorter, and this life is not at all allowed to exceed more than forty years. The procedure of allocating the cost of intangible assets to expense is called amortization. And the method usually companies use is the straight-line method to amortize intangible assets.

Calculating Amortization 

The formula which is used for calculating amortization on an intangible asset is similar to one used for calculating straight-line depreciation. Divide the initial cost of the intangible asset by the estimated or expected useful life of the intangible asset. For example, if it costs $20,000 to obtain a patent and it has an estimated useful life of twenty years, the amortized amount for per year is equal to $1,000.

Formula

Initial Cost / Useful Life = Amortization per Year

$20,000 / 20 = $1,000 per Year