Amortization expense11/9/2022 ![]() ![]() This is important because depreciation expenses are recognized as deductions for tax purposes. Using the straight-line method, the company's annual depreciation expense for the equipment will be $10,000 ($100,000/10 years). Let's say a company purchases a new piece of equipment with an estimated useful life of 10 years for the price of $100,000. Depreciation is a measure of how much of an asset's value has been used up at a given point in time. The entry would include a debit to amortization expense and a credit to the accumulated amortization or intangible asset account. Depreciation is used for tangible assets, which are physical assets such as manufacturing equipment, business vehicles, and computers. Plus, since amortization can be listed as an expense, you can use it to limit the value of your stockholders equity. The purpose of depreciation is to match the expense of obtaining an asset to the income it helps a company earn. Like amortization, depreciation is a method of spreading the cost of an asset over a specified period of time, typically the asset's useful life. AMORTIZATION EXPENSE LICENSEUsing the straight-line method of amortization, which is a method for charging a cost to an expense at a consistent rate over time, the company's annual amortization expense for the license will be $5,000 (that's $50,000/10 years), meaning the asset will decline in value by $5,000 every year. Since the license is an intangible asset, it should be amortized for the 10-year period leading up to its expiration date. Let's say a company spends $50,000 to obtain a license, and the license in question will expire in 10 years. The goal in amortizing an asset is to match the expense of acquiring it with the revenue it generates. Tax law and GAAP (Generally, Accepted, Accounting, Principles) differ on amortization methodologies. Represents decline in intangible assets such as patents, trademarks, copyrights. ![]() Intangible assets are non-physical assets that are nonetheless essential to a company, such as patents, trademarks, and copyrights. Amortization expense: Represents the cost of an intangible asset over time. Amortization and depreciation are methods of prorating the cost of business assets over the course of their useful life.Īmortization is a method of spreading the cost of an intangible asset over a specific period of time, which is usually the course of its useful life. However, because most assets don't last forever, their cost needs to be proportionately expensed based on the time period during which they are used. When a company acquires assets, those assets usually come at a cost. ![]()
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