How does accumulated amortization work?

Definition

Accumulated amortization is the running total of amortization already taken on non-physical assets. On the books, this is a contra-asset account, not an expense and not cash.

It lives under the related rights on the Balance Sheet. Cost minus this balance is the amount still reported for those rights.

Each period's charge raises this account. The original cost stays visible, and this line holds everything written off so far.

The balance only falls when a right is sold, expired, or written off. It does not reset to zero each January on its own.

Where it shows up

Balance Sheet: Located as a reduction of the long-lived intangible lines.

P&L: Related to amortization expense each period.

See also: Intangible Assets · Amortization Expense · Net Book Value

When you look at your Balance Sheet, accumulated amortization sits with the non-current assets as a minus against software, patents, and similar rights. Many packages show one net number; the contra is still in the background.

A growing total means more of the original cost has already been written off. A small total means the rights are new, or that little amortization has been taken yet.

The profit and loss statement does not list this contra account. The related charge shows up as amortization expense while this balance stays on the Balance Sheet.

This account does not move cash. There is nothing to collect and nothing to pay.

How it works

The contra starts at zero when you capitalize a right. Nothing is accumulated until the first period of use is recorded.

At period end you record the slice of cost that belongs to that period. The debit hits amortization expense; the credit hits this contra account.

The original intangible cost does not change with that entry. Only this contra grows, and the net amount reported for the right falls.

The typical slice is original cost divided by the number of periods the right will serve. An $18,000 license over three years is $6,000 a year, if you take it straight-line.

If the right is impaired, the extra cut may go against this contra or directly against the asset. Either way, the net amount on the Balance Sheet falls.

When the right leaves the books, you remove both the original cost and this contra. They should offset so the net remaining amount is what you dispose of.

Reconcile this balance to a list of each right and the amortization taken on it. The total of that list should match the ledger.

Stay with this contra: it is the pile of write-off to date, not this period's charge. The period's charge lives on the Income Statement.

Do not treat this line as a savings account. You cannot write a check against amortization already taken.

Example

A local radio station bought on-air scheduling software for $18,000 cash. The software will serve the station for three years.

At year end the station records one year of write-off:

Debit: Amortization expense $6,000

Credit: Accumulated amortization $6,000

The software cost is still $18,000. This contra is now $6,000, so the net amount on the Balance Sheet is $12,000.

The $6,000 charge hits the P&L. Cash does not move.

After three years the contra will equal the original $18,000. The net amount for that software will be zero.

Common mix-ups

Accumulated amortization is not the same thing as amortization expense. The expense is this period's charge on the P&L; the accumulated account is the pile of all charges to date on the Balance Sheet.

Accumulated amortization is not a cash reserve. You cannot write a check against it.

This contra is not the same as accumulated depreciation. That other line is for physical equipment; this one is for non-physical rights.

Related terms

• Intangible Assets: Non-physical assets such as software, patents, and customer lists carried on the balance sheet.
• Amortization Expense: The periodic charge that writes off an intangible asset over its life.
• Non-Current Assets: Assets the business expects to hold and use for more than a year.
• Net Book Value: An asset's original cost minus the depreciation recorded against it.
• Adjusting Journal Entry: An entry made at period end to record accruals, deferrals, and corrections.
• Useful Life: The number of periods a fixed asset is expected to serve the business.
• Balance Sheet: A statement showing what a business owns, what it owes, and what is left for owners at a single point in time.
• Account Reconciliation: Proving that a ledger balance agrees to independent support.