Final answer:
Amortisation is the process of writing off the initial cost of an intangible asset over its useful life, and it is recorded by debiting an amortisation expense account and crediting an accumulated amortisation account each accounting period.
Step-by-step explanation:
Amortisation is the process of gradually writing off the initial cost of an intangible asset over its useful life. Unlike depreciation, which is used for tangible assets, amortisation specifically applies to assets that do not have a physical presence but still provide value to a business over time, such as patents, copyrights, trademarks, and goodwill. To record amortisation, a company will decrease the value of the intangible asset on the balance sheet and recognize an amortisation expense on the income statement.
Steps to Record Amortisation
- Determine the cost of the intangible asset and its estimated useful life.
- Decide on the method of amortisation to be used, often the straight-line method.
- Each accounting period, debit the amortisation expense account and credit the accumulated amortisation account (a contra asset account) on the balance sheet.
- The amount debited to the amortisation expense is also reflected on the income statement.
This procedure will reflect the usage and expiration of the intangible asset's value as the company benefits from it over time.