Amortization Expense Journal Entry
Overview
In accounting, amortization is the allocation of the cost of the intangible asset over the periods that the company receives the benefits from the asset. Likewise, the company needs to make the journal entry for the amortization expense in each period that it allocates the cost.
Intangible assets are long-term assets that have no physical substance. These assets include copyrights, patents, licenses, trademarks, software, etc. Likewise, the company usually uses the straight-line method for the allocation of the cost of these intangible assets.
Similar to the depreciation, in the amortization expense journal entry, total expenses in the income statement will increase while total assets in the balance sheet decrease. Likewise, the net book value of the intangible asset will become zero when the cost of the intangible asset equal to its accumulated amortization.
Amortization expense journal entry
The company can make the amortization expense journal entry by debiting the amortization expense account and crediting the accumulated amortization account.
| Account | Debit | Credit |
|---|---|---|
| Amortization expense | 000 | |
| Accumulated amortization | 000 |
Accumulated amortization is a contra account to the intangible asset in the balance sheet. Its normal balance is on the credit side. Likewise, the balance of accumulated amortization for the intangible asset should never be more than its cost.
Amortization expense is the income statement item that represents the allocated cost of the intangible asset for the period.
Example
For example, on January 02, 2020, the company ABC Ltd. bought a license that costs $10,000. The license will expire in 10 years.
What is the journal entry for the amortization expense of the license in 2020?
Solution:
As the license will expire in 10 years, the company can calculate the amortization expense with the straight-line method as below:
Annually amortization of license = $10,000 / 10 = $1,000
In this case, the company can make the journal entry for the amortization expense of the license in 2020 as below:
| Account | Debit | Credit |
|---|---|---|
| Amortization expense | 1,000 | |
| Accumulated amortization | 1,000 |
The amortization expense increases (debit) by $1,000 as the value of the license declines by $1,000 with the increase (credit) of the accumulated amortization. Likewise, the net book value of the license as of December 31, 2020, is $9,000 (10,000 – 1,000).