Accounting articles about bookkeeping, Journal entry & statements

Amortization & Goodwill in Accounting

Amortization & Goodwill in Accounting The term Amortization is used to describe the write-off to expense of the cost of an intangible asset over its useful life. The usual accounting entry for amortization consists of a debit to Amortization Expense and a credit to the intangible asset account.

Example of:
Amortization general journal entry in accounting
Debit credit
Amortization Expense 2300 $
intangible asset account 2300$



There is no theoretical objection to crediting an accumulated amortization account rather than the intangible asset account, but this method is seldom encountered in practice.

Although it is difficult to estimate the useful life of an intangible such as a trademark, it is highly probable that such an asset will not contribute to future earnings on a permanent basis. The cost of the intangible asset should, therefore, be deducted from revenue during the years in which it may be expected to aid in producing revenue. Under the current rules of the Financial Accounting Standards Board, the maximum period for amortization of an intangible asset cannot exceed more than 40 years. The straight-line method normally is used for amortizing intangible assets.

Goodwill

Business executives used the term Goodwill in a variety of meanings before it became part of accounting terminology. One of the most common meanings of goodwill in a non accounting sense concerns:

The benefits derived from a favorable reputation among customers.

 To accountants, however, goodwill has a very specific meaning not necessarily limited to customer relations. It means the present value of future earnings in excess of the normal return on net identifiable assets. Above-average earnings may arise not only from favorable customer relations but also from such factors as superior management, manufacturing efficiency, and weak competition.

The phrase normal return on net identifiable assets requires explanation. 'Net assets' means the owners' equity in a business, or assets minus liabilities. Goodwill, however, is not an identifiable asset. The existence of goodwill is implied by the ability of a business to earn an above-average return; however, the cause and precise dollar value of goodwill are largely matters of personal opinion. Therefore, net identifiable assets mean all assets except goodwill, minus liabilities. A normal return on net identifiable assets is the rate of return which investors demand in a particular industry to justify their buying a business at the fair market value of its net identifiable assets. A business has goodwill when investors will pay a higher price because the business earns more than the normal rate of return. 

for more info click to read Goodwill double entry in Accounting



Refrences:
Accounting e-book
computer in bookkeeping
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