Your Business's Intangible Assets Account - dummies

Your Business’s Intangible Assets Account

Many businesses invest in intangible assets — assets without physical existence, in contrast to buildings and computers, for example. Your business’s intangible assets might include

  • The customer list purchased from another company that’s going out of business

  • Patent rights bought from the inventor of a new product or process

  • Another business — lock, stock, and barrel — bought for more than the total of the individual assets of the company are worth

    The extra amount is for goodwill, which may consist of a trained and efficient workforce, an established product with a reputation for high quality, or a very valuable location.

You need to record only intangible assets that you purchase. Your business must expend cash, take on debt, or issue owners’ equity shares for an intangible asset if you want to record the asset on your books. Building up a good reputation with customers or establishing a well-known brand is not recorded as an intangible asset.

The cost of an intangible asset is put in the appropriate asset account, just like the cost of a tangible asset is recorded in a fixed asset account. And, like a fixed asset account (with the exception of land), the cost of an intangible asset that has a limited useful economic life is allocated over its estimated useful life. The allocation of the cost of an intangible asset over its estimated economic life is called amortization, which is very similar to depreciation.

Certain intangible assets, such as trademarks, are viewed as having more or less perpetual useful lives.