Double entries for intangible assets
Double Entries for Intangible Assets
Capitalising Intangible Assets
Capitalising an intangible asset means that the asset is recognized on the statement of financial position (SFP) and can be used to represent value within the business's financial statements. This process is vital because it allows for a more accurate reflection of the company's asset base, ensuring that the intangible assets like patents, trademarks, or copyrights are accounted for properly.
Double Entry for Purchase of an Intangible Asset
To record the purchase of an intangible asset, the accounting treatment follows the double-entry bookkeeping system. This means for every entry made, an equally opposite entry must be recorded. The double entry to record the purchase is as follows:
Individual Account | Category | Explanation |
|---|---|---|
DR Intangible asset – cost (SFP) | Asset | Intangible asset (asset) is recognized; reflects investment in an intangible asset. |
CR Bank/cash (SFP) | Asset | Bank (asset) has decreased as cash is paid out for the purchase. |
Amortisation of Intangible Assets
Amortisation is the systematic allocation of the depreciable amount of an intangible asset over its useful life. It is important for accurately representing the consumption of the asset's value over time, as these assets typically do not have a physical substance but still provide economic benefits.
Double Entry for Amortisation
The double entry to record the amortisation of an intangible asset reflects the expense related to its usage over time. The accounting treatment for recording amortisation is mentioned below:
Individual Account | Category | Explanation |
|---|---|---|
DR Amortisation (SPL) | Expense | Amortisation expense has increased, representing the consumption of the asset's value over time. |
CR Intangible asset – accumulated amortisation (SFP) | Asset | Accumulated amortisation reduces the reported value of the intangible asset on the SFP, reflecting its reduced value as it is amortized over its useful life. |
Importance of Accounting for Intangible Assets
Failing to properly account for intangible assets can lead to significant understatements of a company's financial position. Proper capitalisation and amortisation of these assets provide stakeholders with essential information regarding the company's resource utilization and ongoing investments in future growth.