Lesson 60: Intangible Assets
In this lesson, we will define intangibles and discuss the three most common
types of intangible assets: trademarks, copyrights and patents. We will
complete the lesson by learning some ways that assets can be recorded.
We just finished talking about depreciation, gains and
losses, now let's review the accounting concept of intangible assets. When you
think of assets, you generally think of property, equipment, vehicles or even
financial instruments such as investments.
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Intangibles are essentially the opposite;
they are the types of assets that
are not physical items. They cannot be seen or touched. Intangible assets have
meaningful value and are often in the form of intellectual property.
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Let's first detail some examples of the three most common types of intangible
assets including trademarks, copyrights and patents, then we will talk about
how to journalize them.
A trademark is the right to
use a symbol, logo or name. Trademarks are
often registered through state or federal offices for intellectual property.
The trademark can be renewed every 15 years. Some examples include, the Dominos
pizza logo, the name McDonald's or the website name Google.
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Copyrights are the rights to
use work such as music, literature or art. This type of intangible asset lasts
for the life of the person who created the work plus 50 years, although this
can differ between countries. For example, a song by Coldplay, a book written
by Stephen King or a painting by Vincent Van Gogh.
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Patents are the right to use a product,
process or idea. Patents are also renewable and are
generally valid for 20 years. Examples of patents include the invention of the
artificial heart valve; new varieties of plants and the Amazon 1-click.
Next, let's review the two different ways that intangibles can be recorded:
either by purchasing them or creating them.
Purchasing can be recorded by cost or fair value in
the case the intangible assets were exchanged. If a patent was purchased for
$2,000, the patent would be debited, because it is an asset that is increasing,
and cash would be credited, because it is decreasing.
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Alternatively, if something other than cash was used to
acquire the patent such as company stock, the patent would still be recorded as
a debit but the common stock would be used as a credit. In this case, the fair
value of the intangible asset would be used.
Creating an intangible asset requires the company to expense all costs related
to acquiring the assets. For example, research and development of a patent or
paying a writer to create work that they own the copyrights to.
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The only costs that would not be expensed would be direct costs such as legal
costs that would be capitalized separately.
To conclude our discussion of intangible assets,
there are two types of these assets that determine how the asset is amortized:
finite and indefinite. There are finite assets that are used for a limited time
period such as 30 years and indefinite assets can be renewed and will be in
existence for a continuous amount of time. We will talk more about amortization
in the next lesson.