Skip to content

Fundamentals of Accounting · Depreciation and Amortization

Amortization of Intangible Assets: Method and Examples

Updated 11 October 2026 · Fact-checked

Amortization is the systematic write-off of an intangible asset's cost over its useful life. For a patent or copyright, divide cost less residual value (usually nil) by the useful life in years. Debit amortization to the Profit and Loss Account and credit either the asset or an amortization account.

Understand Amortization of Intangible Assets

An intangible asset has no physical form but gives lasting benefit to a business. Patents, copyrights, trademarks, licences and goodwill are common examples. You pay for them once, but they help the business for several years.

The matching idea says an expense should fall in the period that earns the revenue. So you cannot charge the whole cost in the year of purchase. You spread it over the years of benefit. This spreading is called amortization.

Depreciation and amortization are the same idea. Depreciation is the word used for tangible assets like machinery and buildings. Amortization is the word used for intangible assets. AS 10 defines depreciation as the systematic allocation of the depreciable amount of an asset over its useful life. The same logic applies to intangibles.

Useful life is the period over which the asset is expected to be available for use, or the number of production or similar units expected from it. It can be shorter than the legal life. A patent may be legal for 20 years, but if the technology becomes outdated in 8 years, you amortize over 8.

You should review the useful life and residual value at least at each financial year-end. If expectations change, it is a change in an accounting estimate. Intangibles are normally amortized on the straight-line method unless another pattern of use is clearer. Note that AS 26 deals with intangibles in full, and the supplied AS 10 text only refers to it. Also, goodwill is often written off over a chosen period in exam questions, so always follow the period the question gives.

Key rules to remember

Annual amortization (straight line)
Annual amortization = (Cost − Residual value) ÷ Useful life in years
Residual value of intangibles is usually nil, so it becomes Cost ÷ Useful life.
Amortization for part of a year
Amortization = Annual amortization × Months used ÷ 12
Use this when the asset is bought or sold during the year.
Book value (carrying amount)
Book value = Cost − Accumulated amortization
Shown in the Balance Sheet at the year-end.
Journal entry
Amortization A/c Dr. To Patents A/c (or To Accumulated Amortization A/c)
Then transfer Amortization to the Profit and Loss Account.
Core rule on allocation
Depreciable amount is allocated systematically over the useful life (AS 10, para 52)
Review useful life and residual value at least at each year-end (para 53).

How to solve Amortization of Intangible Assets questions

Use this method for any question on writing off a patent, copyright, goodwill or similar asset.

  1. 1Identify the intangible asset and its cost. Include legal and registration costs if the question says they are part of the cost.
  2. 2Find the useful life. If the question gives a legal life and an expected useful life, use the useful life.
  3. 3Note the residual value. If none is stated, take it as nil.
  4. 4Calculate annual amortization = (Cost − Residual value) ÷ Useful life.
  5. 5Adjust for part-year use by multiplying by months ÷ 12 if the asset was acquired or sold mid-year.
  6. 6Pass the journal entry: Amortization A/c Dr. To the asset (or accumulated amortization) A/c.
  7. 7Transfer the amortization to the Profit and Loss Account and show the asset at cost less amortization in the Balance Sheet.

Quickest way: Divide, write off, show net

When to use it: Use this when a question gives a clear cost, life and straight-line basis and asks for the charge or the closing book value.

  1. Compute annual charge = Cost ÷ Life (after deducting any residual value).
  2. Multiply by the number of years elapsed to get total amortization.
  3. Closing book value = Cost − total amortization.
  4. Check that the book value never goes below the residual value.

Common mistakes in Amortization of Intangible Assets

  • Using the legal life of a patent instead of its useful life

    Students see '20 years' and use it without reading further.

    Fix: Read the question for the expected useful life. Useful life can be shorter than legal or economic life.

  • Forgetting to apply the months factor in the first year

    Students divide by life and stop.

    Fix: If the asset is bought on a date during the year, charge only the months used.

  • Calling the charge depreciation or mixing it up with tangible assets

    Both words describe a write-off, so they seem interchangeable.

    Fix: Use amortization for intangibles and depreciation for tangibles. The calculation idea is the same.

  • Depreciating land along with the building

    Land and building are bought together.

    Fix: Account for them separately. Land normally has unlimited life and is not depreciated (AS 10, para 60).

  • Treating amortization as a cash outflow

    It is shown as an expense, so students credit Bank.

    Fix: It is a non-cash charge. Credit the asset or accumulated amortization account, not Bank.

  • Changing the amortization period in earlier years

    Students try to correct the old charge when the life is revised.

    Fix: A change in useful life is a change in estimate. Spread the remaining book value over the remaining revised life.

Worked examples

Example 1

Sun Pharma Traders buys a patent on 1 April 2025 for ₹6,00,000. Its expected useful life is 5 years and residual value is nil. Calculate the amortization for the year ended 31 March 2026 and the book value on that date. Pass the journal entry.

Show the solution
  1. Cost = ₹6,00,000; useful life = 5 years; residual value = nil.
  2. Annual amortization = ₹6,00,000 ÷ 5 = ₹1,20,000.
  3. The asset is used for the full year, so no part-year adjustment is needed.
  4. Book value on 31 March 2026 = ₹6,00,000 − ₹1,20,000 = ₹4,80,000.
  5. Journal: Amortization of Patents A/c Dr. ₹1,20,000 To Patents A/c ₹1,20,000.
  6. Transfer ₹1,20,000 to the Profit and Loss Account.

Answer: Amortization is ₹1,20,000 and the book value is ₹4,80,000.

Example 2

Bharat Publishers acquires a copyright on 1 October 2025 for ₹3,60,000. Its useful life is 6 years and residual value is nil. The financial year ends on 31 March. Find the amortization for 2025-26 and the book value on 31 March 2027.

Show the solution
  1. Annual amortization = ₹3,60,000 ÷ 6 = ₹60,000.
  2. For 2025-26 the copyright is used for 6 months (October to March).
  3. Amortization for 2025-26 = ₹60,000 × 6 ÷ 12 = ₹30,000.
  4. Amortization for 2026-27 = ₹60,000 for the full year.
  5. Total amortization up to 31 March 2027 = ₹30,000 + ₹60,000 = ₹90,000.
  6. Book value on 31 March 2027 = ₹3,60,000 − ₹90,000 = ₹2,70,000.

Answer: Amortization for 2025-26 is ₹30,000 and the book value on 31 March 2027 is ₹2,70,000.

Exam tips

  • Write the formula first, then substitute. Examiners give marks for method even if arithmetic slips.
  • Check the date of acquisition. Part-year questions are a common trap.
  • Write the journal entry with the full account names and amounts, then show the Balance Sheet extract.
  • For goodwill, follow the write-off period stated in the question and show it at cost less amount written off.
  • In Paper 2, state briefly that amortization is a non-cash expense charged to the Profit and Loss Account.

Practice questions from Depreciation and Amortization

Amortization of Intangible Assets in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Amortization of Intangible Assets: frequently asked questions

What is the difference between amortization and depreciation?

Depreciation is the systematic write-off of tangible assets such as machinery. Amortization is the same process for intangible assets such as patents and copyrights. The calculation idea, spreading cost over useful life, is the same.

How do you amortize a patent in accounts?

Divide the cost, less any residual value, by the useful life in years. Debit Amortization A/c and credit Patents A/c or accumulated amortization. Then transfer the charge to the Profit and Loss Account.

Is goodwill amortized?

In CSEET questions, goodwill is often written off over a period the question states. Follow that period. Show the unwritten balance as an asset in the Balance Sheet.

Which method is used to amortize intangible assets?

The straight-line method is most common in exam questions. AS 10 says the method chosen should reflect the expected pattern of consumption of benefits and be applied consistently.