Amortization, like depreciation, is the process of deducting, over a set period of time, the costs incurred in the procurement of assets. Whereas depreciation is used to expense out (over the useful life) the costs of tangible assets such as buildings, furniture, and machines; amortization is used to recover the cost of intangible assets such as:
• Going into Business Costs – start-up expenditures, the cost of incorporating, etc.
• Lease for Business Property
• Goodwill, patents, customer base, permits, etc.
• Reforestation Costs – direct costs of planting or seeding
• Pollution Control Facilities
When the intangible asset is originally purchased the cost should be debited to an asset account. This cost is then “written off” or amortized, generally using the straight-line method, over the legal useful life of the asset (see IRS Publication 535 Chapter 9 for amortization period guidelines). The straight line method is simply dividing the initial cost of the asset by its useful life.
For example if a patent is purchased for $12,000 and amortized over 15 years (180 months) then the monthly write-off would be $66.67 (12,000/180).
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|Amortization Expense – Patents|