As depreciation is a reduction in the value of tangible fixed assets. In the same way, any reduction in the value of intangible assets such as goodwill, patents, trademarks, etc. is termed amortization. Similar to depreciation, amortization is also a loss for the business which is shown on the debit side of the Profit and Loss Account.
For example, the goodwill of a firm is Rs 10,000, and goodwill written-off during the year is Rs 2,500. In this case, a reduction of Rs 2,500 in the value of goodwill is considered as amortization of goodwill.
When Intangible Asset wrote off is given outside the Trial Balance
Treatment of amortization of intangible assets in the final accounts is as follows.
First, the intangible assets written-off are shown on the Debit side of the Profit and Loss Account.
Secondly, the final value of intangible assets (i.e. the value after deducting the amount written-off) is shown on the Assets side of the Balance Sheet under the head Fixed Assets.
When Intangible Assets written-off are given Inside the Trial Balance
There may be a situation when intangible assets written off during the year are given inside the Trial Balance. In such a case, intangible assets given in the Trial Balance are already shown at their reduced values (i.e. after writing off the amount). Therefore, the amount written-off is not required to be deducted again from the concerned intangible assets in the Balance Sheet. It is shown only on the Debit side of the Profit and Loss Account like any other expense.
Operating Profit can be defined as the profit earned by carrying the normal business activities. It is computed by subtracting the operating expenses from the gross profit.
The balance sheet is the last financial statement that is prepared by any organization. This statement helps to ascertain the true financial position of an enterprise at the end of an accounting period
A profit and Loss Account is the second financial statement prepared by an organization. This account is prepared to ascertain the net results of a firm in form of net profit earned or net loss incurred during an accounting period.
In order to incorporate adjustments in the financial statements, we pass the required Journal entries, which are termed as adjusting entries.