How do I setup Amortization in the chart of accounts?
I need to know the type of account this should be for dealing with "Goodwill", "Non-Competes", etc. from the purchase of the business.
Thanks, Allen
Set up an asset account for the Goodwill and another for the Covenant Not to Compete. These should be classified as Other Assets on the Balance Sheet. You will also need an expense account named Amortization Expense. Amortize these items over 15 years (180 months). Each Month take 1/180th of each asset value and create a journal entry to debit amortization expense and credit the related asset account. You can credit the related asset account directly or like depreciation, you can set up a contra asset account - accumulated amortization and capture your credit there.
Thanks for the EXCELLENT and clear advice! I was in good shape until I got to "contra asset account" for depreciation (which I was not sure I was handling correctly anyway). Could you give me similar advice on setting up the depreciation accounts correctly? The problem that I seem to be running into is a sign convention on my Balance Sheet for both Amortization and Depreciation.
If I am following your instructions correctly, the amortization will be a positive amount on the Asset side of the Balance Sheet and a Expense on the P&L. How does this work for Depreciation? Is Depreciation an Asset on the Balance Sheet and an Expense on the P&L?
Thanks again, Allen
Actually, the amortization(or depreciation) is a negative(credit) on the Asset Side of the b/s. Expenses are positives(debits).
The amortization entry goes like this: DR Amort Exp, CR Accumulated Amortization(the contra account to the Asset)
So a $15,000 asset amortized over 15 years each year would be
DR $1,000 Amort Exp CR Accum Amort $1,000. After one year the Asset would net to $14,000($15,000 minus $1,000)
