Understanding intangible assets

Definition

Intangible assets are rights and other non-physical items the business will use for more than a year. On the books, these are assets, not expenses and not something you can touch on a shelf.

Software you bought, a patent, a trademark, and a purchased customer list all belong here. They sit on the Balance Sheet until their cost is written off over the periods that use them.

You record them when you buy or legally obtain them, at what they cost you. You do not record a brand you built yourself, because that work already hit the P&L as you spent it.

These balances are the remaining cost of the rights. They are not cash, and they are not the physical stills and barrels in the room.

Where it shows up

Balance Sheet: Located with the long-lived assets, below current assets.

P&L: Related to amortization taken each period.

Cash flow: Increases in this account, reported cash from investing activities decreases.

See also: Accumulated Amortization · Amortization Expense · Non-Current Assets

When you look at your Balance Sheet, intangible assets sit with the non-current assets, below current assets. The line is often shown net of amortization already taken.

A high total can mean recent purchases of software, names, or lists. A low or zero total can mean the business never capitalized those costs, or that older rights are already written down.

The profit and loss statement does not list the asset as a line. Amortization shows up as an expense while the rights stay on the Balance Sheet.

Buying a long-lived right is an investing cash outflow on the Statement of Cash Flows. Cash falls, this account rises, and the P&L does not take the full cost that day.

How it works

A purchase lands here when the right will serve more than a year and it passes the capitalization threshold. The debit hits software, a trademark, a patent, or a customer list; the credit hits cash or a payable.

Not every spend on ideas belongs here. Training, ordinary website tweaks, and internally built brand spend usually hit the P&L as they happen.

Each period, amortization moves a slice of cost to the P&L. A contra account holds all of that write-off to date, so the original cost and the write-off stay visible.

The remaining book amount is original cost minus that contra balance. That leftover amount is what still sits in this grouping.

If later cash from the right will not cover the leftover amount, an impairment cuts it further. That extra cut is not the same as the planned amortization.

The asset leaves the books when it expires, is sold, or is written off in full. You remove both the original cost and the amortization already taken.

Keep a simple list of each right, its cost, and its life. A trademark still in use should be on that list; a retired software license should not.

Finite-lived rights get amortized. A purchased business premium is a related item that follows different rules.

Example

A craft distillery pays $24,000 cash for exclusive rights to a regional brand name it will print on bottles for years.

The distillery records:

Debit: Trademark $24,000

Credit: Cash $24,000

The trademark sits with the long-lived assets. Cash from investing activities falls by $24,000, and the P&L does not take a $24,000 expense that day.

Over the years the name is used, amortization will move the cost to the P&L a slice at a time. The asset line stays until that cost is gone.

Common mix-ups

Intangible assets are not the same as expenses. Buying a trademark raises an asset; the expense arrives later as amortization.

Intangible assets are not physical plant. Stills, barrels, and the stillhouse sit in a different grouping.

A brand you built in-house is not the same as a brand you bought. The purchased name can sit here; the homemade reputation already hit the P&L.

Related terms

• Accumulated Amortization: The contra-asset account holding amortization recorded against intangible assets.
• Amortization Expense: The periodic charge that writes off an intangible asset over its life.
• Goodwill: The premium paid for a business above the fair value of its identifiable net assets.
• Non-Current Assets: Assets the business expects to hold and use for more than a year.
• Asset Impairment: Writing an asset down when its carrying value exceeds what it can actually earn.
• Capitalization Policy: The written dollar threshold and rules for recording a purchase as an asset instead of an expense.
• 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.