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Purchase license validity one year

KANNAREDDY (tax analyst) (73 Points)

30 December 2016

What is the accounting treatment for Purchase of License with validity for One year

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Anirban Dutta (Finance Manager) (125 Points)
Replied 30 December 2016

in which act. software - inform

KANNAREDDY (tax analyst) (73 Points)
Replied 30 December 2016

Visual studio license valid for 1year from Msft

Anirban Dutta (Finance Manager) (125 Points)
Replied 30 December 2016

no no ............ on which sofware u are maintaining the accounting like tally, ace..........

KANNAREDDY (tax analyst) (73 Points)
Replied 30 December 2016

Yes we are maintaining on Tally

Anirban Dutta (Finance Manager) (125 Points)
Replied 30 December 2016

Computer software is an intangible Asset and therefore must be capitalised and amortised over its useful life. The entries are:

Dr: Intangible Asset
Cr: Accounts Payable

If the licence is valid for only 1 year, then the asset must be amortised over its useful life. If you renew, then the process starts over. How the amortisation entries are to be posted depends on your reporting requirements. If you present monthly financial statements (which is usually the case) then the amortisation amount needs to be calculated monthly (you can simply calculate the annual amount and divide by 12) and booked as follows:

Dr: Amortisation Expense
Cr: Provision for Amortisation

Amortization expense is the write-off of an asset over its expected period of use, which reflects the consumption of the asset. This write-off results in the residual asset balance declining over time. The amount of this write-off appears in the income statement, usually within the "depreciation and amortization" line item.

The accounting for amortization expense is a debit to the amortization expense account and a credit to the accumulated amortization account. The accumulated amortization account appears on the balance sheet as a contra account, and is positioned after the intangible assets line item. In some balance sheets, it may be aggregated with the accumulated depreciation line item, so only the net balance is reported.

As example:

ABC Corporation spends Rs.40,000 to acquire a taxi license that will expire and be put up for auction in five years. This is an intangible asset, and should be amortized over the five years prior to its expiration date. The annual journal entry is a debit of Rs.8,000 to the amortization expense account and a credit of Rs.8,000 to the accumulated amortization account.

The rate at which amortization is charged to expense in the example would be increased if the auction date were to be held on an earlier date, since the useful life of the asset is reduced.