Accounting Examples - Amortization Example

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Amortization

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, 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).

General Journal

Page: 1

Date

Account Titles/Explanation

Ref

Debit

Credit

20XX
Jan

Amortization Expense - Patents

Patents

55
14

66.67

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