What Is Amortization of Intangible Assets?

Amortization is the process of gradually expensing the cost of an intangible asset over its useful life. Intangible assets are assets that do not have a physical form, such as patents, trademarks, copyrights, and customer lists.

Example

For example, let's say that a company acquires a patent for a new product for $100,000. The patent has a useful life of 10 years. In this case, the company would amortize the cost of the patent by expensing $10,000 per year ($100,000 / 10 years) as an intangible asset on its income statement.

Importance

Amortization is important because it allows a company to gradually expense the cost of an intangible asset instead of recognizing the entire cost in the year the asset is acquired. This allows the company to better match its expenses with the revenue it generates from using the intangible asset.

Accounting Treatment

Under generally accepted accounting principles (GAAP), intangible assets must be amortized over their useful lives unless they have an indefinite useful life. This means that the cost of the intangible asset must be allocated to expense over the period of time during which it is expected to generate economic benefits for the company.

Conclusion

In conclusion, amortization of intangible assets is the process of gradually expensing the cost of an intangible asset over its useful life. This allows a company to match its expenses with the revenue it generates from using the intangible asset and provides a more accurate representation of its financial performance.