Intangible Assets | Intellectual Assets | Biological Assets | Amortization
Arjun EP
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Intangible Assets | Intellectual Assets | Biological Assets
Intangible assets are also known as fictitious assets.
There are various types of intangible assets; they are preliminary expenses, discount on issue of debenture, underwriting commission, goodwill, discount on issue of shares, premium on redemption of debentures etc.
There are various types of intellectual assets; they are patents, trademarks, copyrights, goodwill, franchises, license to use etc.
Biological assets are alive natural resources and live stocks.
Biological Assets
There are three types of biological assets; they are animals, agricultural products, trees and cannabis.
Under animals, all types of animals and birds are included (dairy firm, poultry firm, pig firm); they are also used for meat firm.
Under the agriculture products, all types of grains and vegetables are included.
Under threes, all types of tress, shrub, herbs and grasses are included paper and forest products).
Under the cannabis, drug plants are included like hemp and opium (apheem); in many countries, cannabis is illegal.
Biological assets recorded as current assets or non-current assets (fixed assets) according to their nature.
Generally, biological assets are NOT depreciated, they are revalued at fair value (market value).
If they are depreciated, reasons must be mentioned with method of depreciation.
Types of intellectual Assets
Some intellectual assets are explained below:
Patents
Patent is an exclusive rights of inventor and manufacture.
It is a form of intellectual property.
There are three types of patents; they are utility patents, plant patents and design patents.
The utility patent is one of the most common patents; it is also known as a patent for the invention.
Sometime patents are applied on assembled goods, selling rights, making rights, using rights etc.
The state or central government issues rights to inventors for patents.
A patent is a non-renewable asset.
However, companies can extend the legal life of a patent by obtaining new patents for improvements or other modifications in the basic design.
Courtesy: U.S. Patent and Trademark Office
In most countries, patent rights fall under civil law legal system and the patent holder must sue someone infringing of the patent rights.
The estimated useful life of the patent may change if technology or consumer tastes change.
After fulfillment of required documents, government grants exclusive patents rights.
However, a patent application must include one or more claims that define the scope of protection that is being sought.
Patent holders amortize the patent cost over its 20-year legal life or its useful life, whichever is shorter.
A Trademark is a sign of serious commercial intent and protects/increases the goodwill of the owner’s business
It is seen as an evidence of ownership
A trademark gives the owner legal recourse against illicit use
Trademarks or Trade name
Trademark is written as trade mark or trade-mark.
Trademark is also used for service; it is called service mark.
It is also known as trade name; it is a name or symbol used to identify a business and its products.
It is an intellectual asset.
It increases the goodwill of the owner’s business; it is seen as an evidence of ownership.
A trademark gives the owner legal recourse against illegal use.
A business logo is an example of a trademark because every large organization has its business logo.
Trademarks are created for names, symbols, letter (s), catchphrases, figures and slogan.
The creator, author or owner obtains the exclusive legal right to the trademark by registering it.
When a company purchases the trademark, purchase price of trademark is recorded as an intangible asset in a balance sheet.
In case a company develops the trademark, any costs related to these activities are expensed as incurred.
The legal protection of a trademark prevents other businesses from using the specific image, symbol or text associated with the brand.
Keep in Mind
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© |
copyright |
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copyleft, royalty free |
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TM |
trademark |
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SM |
service mark |
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® |
registered trademark |
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℗ |
sound recording copyright, phonogram |
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creative common, royalty free |
Copyrights
These are exclusive rights to publish and sell an artistic work, literary work, musical composition etc.
Copyrights protect the works from reproduction or derivative use without the consent of the copyright owner.
Usually, copyright owner is known as the author or publisher.
The state or central government issues copyrights.
Copyright extends for 70 years beyond the author’s death.
Copyright cost includes all costs of creating the work plus any administrative or legal costs of obtaining the copyright.
In general, the useful life of copyright is significantly shorter than its legal life.
Business organizations amortize copyrights over a relatively short period.
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Artistic work |
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It includes a painting, a drawing, sculpture, an engraving, photograph |
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Dramatic work |
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It includes recitation, videography, choreographic work or entertainment. |
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Literary work |
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It includes literary writings, computer programmes, compilations and computer databases |
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Musical work |
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It includes music and graphical notation of such work; but it does not include any words or any action intended to be sung, spoken or performed with the music. |
Copyrights
These are exclusive rights to publish and sell an artistic work, literary work, musical composition etc.
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Accounting Equation |
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Basic Journal Entries in Nepali |
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Basic Journal Entries |
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Journal Entry and Ledger |
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Ledger |
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Subsidiary Book |
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Cash Book |
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Trial Balance & Adjusted Trial Balance |
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Bank Reconciliation Statement (BRS) |
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Depreciation |
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Final Account: Class 11 |
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Adjustment In Final Account |
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Capital and Revenue |
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Single Entry System |
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Non-Profit Organization (Non-Trading Concern) |
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Government Accounting |
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Goswara Voucher (Journal Voucher) |
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Goodwill
Goodwill is an intangible asset.
It appears in the balance sheet of the organization.
From the different angle of view, goodwill is the result of more or less permanent impression of product (s), service after sales of the organization.
It is applicable only among competitive business; goodwill includes:
High-quality products
Exceptional management
A desirable location
Excellent customer relations
Skilled employees
Pleasant relations with labour unions etc.
Customers purchase iPhone due to its goodwill.
There are other mobile phone companies but most of the high level income customers purchase iPhone.
Keep in Mind
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(a) |
Simple average goodwill |
= Average profit x Number of years purchase |
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(b) |
Weighted average goodwill |
= Weighted average profit x Numbers of years purchase |
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(c) |
Super profit goodwill |
= Super profit × Number of years purchase |
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Where: |
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Capital employed |
= Sundry assets – Sundry liabilities |
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Normal profit |
= Capital employed x Normal rate of return |
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Super profit |
= Actual average profit – Normal profit |
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(d) |
Capitalized method goodwill |
= Economic value of business (EVB) – Actual value of business (AVB) |
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Where: |
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EVB |
= (Actual average profit ÷ Normal rate of return) x 100 |
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AVB |
= Sundry assets – Sundry liabilities |
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Actual profit |
= Average profit – Salary or expenses |
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(e) |
Annuity method goodwill |
= Super profit – Annuity value |
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Franchises
Franchise is a type of joint venture between franchisor and franchisee.
The franchisor is the original business owner or organization.
The franchisor grants permission to the franchisee the right to sell specific products or services.
Franchisee uses certain trademarks, usually within a designated geographic area.
Franchisee buys this right to sell the franchisor’s goods or services under an existing business trademark and model.
Top 10 International Franchises
Franchises are the popular way for entrepreneurs to start a business.
It is the one of best way for entering a highly competitive industry such as fast food.
One big advantage to purchasing a franchise is to access to an established company’s brand name.
While choosing franchise business, investor will not need to spend resources getting brand name and product out to customers.
Before buying a franchise, investors should carefully read the Franchise Disclosure Document.
This document contains information about franchise fees, expenses, performance expectations and other key operating details.
Top 10 International Franchises
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SN |
Brand |
Founded |
Numbers of Outlets |
Products or Services |
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1 |
MacDonald’s |
1954 |
33,000+ |
Hamburgers and fast food |
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2 |
7-Eleven |
1927 |
55,000+ |
Convenience store chain |
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3 |
KFC |
1930 |
19,000+ |
Fried chicken |
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4 |
Subway |
1965 |
42,000+ |
Sandwich and role |
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5 |
Burger King |
1953 |
13,000+ |
Burger |
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6 |
Hertz |
1918 |
11,500+ |
Car rental |
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7 |
Ace Hardware |
1924 |
4,800+ |
Non-grocery retail cooperative |
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8 |
Circle K |
1951 |
8,200+ |
Convenience store chain |
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9 |
Pizza Hut |
1958 |
14,000+ |
Pizza |
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10 |
Wendy’s |
1969 |
6,500+ |
Hamburgers |
License to use
License is known as the contractual right to use another’s patents, trademarks, copyrights, lease etc.
Examples of license include:
Landlord or public land charges license free for using for telephone lines, electric lines, fiber internet cable, cable TV lines etc.
State government and municipality charges license fee for private telephone operators, electricity suppliers, fiber internet cable, cable TV lines etc.
Government charges spectrum charges for taking permission of mobile network, internet, airwaves for radio or TV broadcasting etc.
Publishers and creators take royalty or fee for copyrights photos, videos, songs, articles etc for reusing them.
Keep in Mind
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Tangible assets are depreciated but intangible assets are amortized. |
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Amortized amount of intangible assets are recorded in debit side of profit and loss account or recorded in income statement. |
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Amortized amount of intangible asset is deducted from intangible asset in balance sheet. |
Written Off and Amortization
Assets are fixed assets, current assets and intangible assets and intellectual assets.
Fixed assets are depreciated but intangible assets and intellectual assets are amortized or written off.
In current assets, there is never depreciation.
Intangible assets and intellectual assets do not exist in touchable form and there is no monetary value.
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Share (Accounting for Share) |
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Share in Nepali |
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Debentures |
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Final Account: Class 12 |
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Final Account in Nepali |
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Work Sheet |
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Ratio Analysis (Accounting Ratio) |
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Fund Flow Statement |
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Cash Flow Statement |
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Theory Accounting Xii |
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Theory: Cost Accounting |
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Cost Accounting |
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LIFO−FIFO |
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Cost Sheet, Unit Costing |
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Cost Reconciliation Statement |
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Written off or Amortization
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Intangible assets (by name) written off |
Dr |
Depreciation on intangible assets |
Increase in expenses |
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To Intangible assets (by name) |
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Name of intangible assets |
Decrease in assets |
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(Being- fictitious assets written off) |
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Journal Entry
In the book of …………
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Date |
Particulars |
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LF |
Amount Dr |
Amount Cr |
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Amortization or written off account |
Dr |
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xxxx |
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To Intangible assets (by name) |
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xxxx |
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(Being- fictitious assets written off) |
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Profit and loss account |
Dr |
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xxxx |
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To Amortization or written off account |
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xxxx |
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(Being- intangible assets written off transferred to profit and loss account) |
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Keep in Mind (KIM)
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Written off and amortization are non-cash expenses. |
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There are three types of assets; they are tangible assets, intangible or intellectual assets and current assets. |
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Tangible assets: plant and machinery, land and building, furniture and fitting, vehicles, equipment etc. |
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Intangible assets: preliminary expenses, discount on share or debentures, loss on issue of debentures etc. |
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Intellectual assets: patents, trademark, copyrights, goodwill, franchise, license etc. |
PROBLEM:
The following extracted transaction is available on 31st December:
Patents are written off $/₹/Rs 75,000.
Copyrights amortized of $/₹/Rs 60,000.
Goodwill $/₹/Rs 80,000 is written off during 5 years
Write off preliminary expenses $/₹/Rs 15,000.
Write off discount on issue of debenture $/₹/Rs 10,000
Amortize underwriting commission of $/₹/Rs 14,000
Discount on shares $/₹/Rs 50,000 is amortized in 4 years.
Required: Journal entries
SOLUTION:
Given and working note:
Goodwill written off = Rs 80,000 ÷ 5 years = Rs 16,000
Discount on issue of shares = Rs 50,000 ÷ 4 years = Rs 12,500
Journal Entries
In the book of ……..
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Date |
Particulars |
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LF |
Amount Dr |
Amount Cr |
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31 Dec |
Patents written off account |
Dr |
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75,000 |
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To Patents account |
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75,000 |
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(Being- patents written off) |
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31 Dec |
Copyrights written off account |
Dr |
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60,000 |
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To Copyrights account |
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60,000 |
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(Being- copyright written off) |
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31 Dec |
Goodwill written off account |
Dr |
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16,000 |
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To Goodwill account |
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16,000 |
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(Being- goodwill written off) |
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31 Dec |
Preliminary expenses written off account |
Dr |
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15,000 |
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To Preliminary expenses account |
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15,000 |
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(Being- preliminary expenses written off) |
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31 Dec |
Discount on issue of debenture written off account |
Dr |
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10,000 |
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To Discount on issue of debenture account |
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10,000 |
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(Being- discount on issue of debenture written off) |
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31 Dec |
Amortization of underwriting commission A/c |
Dr |
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12,000 |
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To Underwriting commission account |
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12,000 |
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(Being- depreciation charged on car) |
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31 Dec |
Amortizations of issue of shares account |
Dr |
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12,500 |
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To Issue of share account |
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12,500 |
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(Being- depreciation charged on car) |
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