14 Apr What is Accumulated Amortization?
Accumulated amortization refers to the total of the expense that has been charged over the years to reduce the value of an intangible asset like a patent or a copyright.
What Does Accumulated Amortization Mean?
When an organization acquires an intangible asset that depletes in value over time, it is necessary to reduce its value in the company’s balance sheet in a gradual manner. This is done by debiting the amortization expense account and crediting the accumulated amortization account.
The amortization of the intangible asset is completed over its useful life. Amortization is similar to depreciation, but there is one crucial difference. Tangible assets like machinery, equipment, and buildings are depreciated. However, amortization is always carried out with reference to intangible assets.
Examples of intangible assets are:
- Noncompetition agreements
- Customer lists
- Licensing agreements
A patent is an exclusive right granted by the government to manufacture a certain product for 17 to 20 years. During this time, other manufacturers are not permitted to make the same product. This “right” or patent is an intangible asset owned by the company.
But as the patent will expire in some years, it is necessary that an amortization expense is recorded in the company’s income statement every year. It should be remembered that amortization is usually calculated on a straight-line basis. The total of this amount is referred to as accumulated amortization.
The accumulated amortization amount is reduced from the intangible asset’s value in the company’s balance sheet.
Accumulated Amortization Example
Bradley Engineering is an auto parts manufacturer who is granted a patent by the U.S. Patent and Trademark Office for a specialized engine part. The patent will be valid for 18 years and was developed by Bradley Engineering at a cost of $1.8 million.
The patent is initially reflected in the company’s balance sheet at a value of $1.8 million. The company starts the manufacture of the specialized engine part in 2018.
It will debit an amount of $100,000 to amortization expense every year. By doing this, the accumulated amortization will total to a sum of $1.8 million in 18 years, which is the patent’s life.
Accumulated amortization is the total of the amortization cost that has been charged to the income statement against an intangible asset.