What kind of account is amortization expense

It has numerous register trademarks, copyrights, and patents for its work. Alan will make this journal entry every year to the record the current amortization expense and cumulative expense over the life of the asset. The current expense will be reported on the income statement and the updated accumulated total will be reported on the balance sheet each year. Search for:. In company record-keeping, before amortization can occur, the purchase of the asset must be recorded.

The cost of the asset is entered in a balance sheet account, with the offsetting entry to the account representing the method of payment, such as cash or notes payable. The company determines the useful life of the asset and divides the purchase amount by the number of accounting periods occurring during that life.

Amortization expense is an income statement account affecting profit and loss. The offsetting entry is a balance sheet account, accumulated amortization, which is a contra account that nets against the amortized asset.

The Internal Revenue Service requires companies to report their amortization expenses on a separate schedule when they file their income tax returns. The proper form to use is IRS Form Complete Part VI and submit it with your tax return. Using accounting software to manage intangible asset inventory and perform these calculations will make the process simpler for your finance team and limit the potential for error. Amortization applies to intangible assets with an identifiable useful life—the denominator in the amortization formula.

In contrast, intangible assets that have indefinite useful lives, such as goodwill, are generally not amortized for book purposes, according to GAAP. There are some limited exceptions to this rule that allow privately held businesses to amortize goodwill over a 10 year period. The IRS may require companies to apply different useful lives to intangible assets when calculating amortization for taxes. It requires companies to apply a year useful life when calculating amortization for these assets for tax purposes.

Intangible assets that are outside this IRS category are amortized over differing useful lives, depending on their nature. Many examples of amortization in business relate to intellectual property, such as patents and copyrights. Download our free work sheet to apply amortization to intangible assets like patents and copyrights. Amortization and depreciation are similar in that they both support the GAAP matching principle of recognizing expenses in the same period as the revenue they help generate.

Entrepreneurs often incur startup costs to organize a business before it begins operating. For tax purposes, however, some startup and organizational costs may be capitalized and amortized over periods up to 15 years, after taking initial deductions in the first year of operations. Determining which payments can be capitalized, and maintaining the associated additional amortization schedules, can be a tedious process.

They standardize reporting so all…. Business Solutions Glossary of Terms.