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