Accumulated Amortization

What is Accumulated Amortization?

Accumulated amortization is an aggregated value of the amortization expense that has been recorded for an intangible asset based on the cost, lifetime and usefulness that has been allocated to the asset in producing the units, often viewed as the repayment that the firm would have to do to own the underlying intangible asset.

Accumulated Amortization

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Source: Accumulated Amortization (

Accumulated Amortization Formula

Accumulated Amortization is an aggregated value and hence can be expressed mathematically as:

Accumulated Amortization = ∑ Amortized Value of the Asset Each Year

Example of Accumulated Amortization

Accumulated amortization is used to realize the value of intangible assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. read more. Examples of these type of assets are:

  • Patents
  • Exclusive contract
  • Licensing agreement

An important point to note is that these values do diminish in value and eventually get to zero.

Consider the example of a patent. Let’s consider a major pharma firm ABC Healthcare headquartered in New York, the US, who spends a good amount of money on its Research and developmentResearch And DevelopmentResearch and Development is an actual pre-planned investigation to gain new scientific or technical knowledge that can be converted into a scheme or formulation for manufacturing/supply/trading, resulting in a business more wing and comes up with a breakthrough drug that can help a deadly disease like cancer. This breakthrough has been the result of years of research by its R & D department.

The firm files a patent for this drug and holds exclusive rights for the next 10 years for 12 million dollars. During these 7 years, other firms and competitors are not allowed to produce this drug, although they can come up with a partnership with our firm but only at their discretion. However, the patent will expire and hence should be realized in the financials.

Let’s design the cash flow for this expense, considering ABC healthcare follows a straight-line amortizationStraight-line AmortizationStraight-line amortization amortizes the cost of intangible assets or allocates the interest expenses associated with the bond's issue in each accounting period until the end of the intangible asset or maturity of bond respectively in the income more mechanism.

You can download this Accumulated Amortization Excel Template here – Accumulated Amortization Excel Template

YearAmortization ExpenseAccumulated Amortization

This expense will continue to be part of the balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the more till 2029 post, which is completely amortized.

Refer to the given above excel sheet for detailed calculation.

Important Points to Note About Accumulated Amortization


Accumulated amortization is a useful mechanism to evaluate the value of intangible assets and the usefulness they provide to the firm. However, the point to note is that not all intangible assets can be amortized. Consider the case of patents and licensing agreements. These methods help in evaluating the competitive edge that firm gains in comparison to its peers and how it can use it present its financials in a better way to its shareholders.

Now consider the case of another intangible asset, Goodwill. GoodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase more, as we know, is a measure of the synergy capacity that the firm has acquired over a time frame as a result of acquisitions. Hence goodwill should never be amortized as this value should always increase. In fact, much like land, which is never depreciated, it should be reviewed once a year to provide a better and current view of the underlying assetThe Underlying AssetUnderlying assets are the actual financial assets on which the financial derivatives rely. Thus, any change in the value of a derivative reflects the price fluctuation of its underlying asset. Such assets comprise stocks, commodities, market indices, bonds, currencies and interest more. One should see it as having an indefinite life and always adding value to the firm’s financials.

This has been a guide to Accumulated Amortization. Here we discuss formula to calculate the accumulated amortization along with an example and its importance. You can learn more about accounting from the following articles –

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