Today’s article is devoted to the topic of depreciation accounting for intangible property, in connection with which we will take a closer look at the purpose of account 05 in accounting, as well as the method for correctly calculating this category of expenses, existing depreciation methods, standard accounting entries and examples from real life on this question.
Essence and purpose of 05 accounts
Accounting for depreciation costs for intangible objects has its own characteristics, which the accounting department of each company should be aware of.
The essence and necessity of account 05 is to collect and summarize information about depreciation amounts that are accrued over the entire period of application of a particular intangible asset.
As with tangible assets, companies record obsolescence and intangible costs. Thus, the cost of these objects is partly included in the costs of the organization. To account for the accrued depreciation amounts, 05 balance sheet account is used.
The designated account is passive in nature, i.e. accrued amounts of such costs are reflected in the credit part, while the corresponding production cost accounts are indicated in the debit, including 20, 23, 25, 26.
Depending on the type of intangible asset, separate sub-accounts can be opened for account 05. However, the chart of accounts does not specify what the designated sub-accounts should be. In accordance with existing rules, the annual order on accounting policy also approves a working chart of accounts, which should ensure the collection and analysis of information about this category of enterprise property. In this regard, companies can open the following sub-accounts to record the designated costs for the respective facilities, including:
- 05/1 – for licenses;
- 05/2 – for example, for scientific inventions;
- 05/3 – for patents.
Proper depreciation of intangible property
In the course of depreciation of this category of property, its price is gradually transferred to the cost of goods produced, work performed or services rendered. These costs should be accrued on a monthly basis. The beginning of recognition of the costs of obsolescence of intangible assets falls on the next month after, for example, the purchase of an object and its reflection on balance sheet account 04. The company should cease to take into account these costs after the designated category of property is written off the balance sheet as a result of its free transfer, sale, etc., and also after depreciation is fully accrued.
The book value and residual value of intangible assets, as well as its useful life, are called as key accounting indicators necessary for calculating this category of costs. When calculating the latter indicator, factors such as the period of use of the facility in accordance with the signed contract, as well as the period during which the company intends to receive economic benefits from its use, are taken into account.
The company determines the useful life period for each such object individually and reflects it in the depreciation sheets.
Obsolescence Costing Methods
To date, in accounting practice, there are the following methods for calculating the depreciation of intangible objects:
- linear method;
- declining balance method;
- write-off of depreciation in proportion to the volume of output.
In this case, one of the listed methods is applied throughout the entire useful life to a homogeneous group of intangible assets.
The annual amount of accrued depreciation is determined by:
- in the case of applying the straight-line method, depending on the initial cost of the objects and the depreciation rate calculated on the basis of their entire useful life;
- under the declining balance method – based on the residual value of the property at the beginning of the reporting period and the calculated depreciation rate.
During the reporting year, depreciation costs are charged monthly, regardless of the chosen method, in the amount of 1/12 of the annual depreciation amount.
If the method is chosen in proportion to the volume of goods produced, then the calculation of this category of costs is carried out on the basis of the natural expression of the volume of products produced during the reporting period. In this case, the ratio of the initial price of the asset and the estimated volume of goods that are planned to be produced during the entire useful life of the asset is calculated.
Standard accounting entries
If we consider the basic postings for depreciation for intangible assets, then we should highlight:
- Dt 20, 23 25, 26 – Kt 05 – depreciation depending on the production unit in which this property is occupied;
- Dt 44 – Kt 05 – depreciation on intangible assets employed in the trading process;
- Dt 83 – Kt 05 – additional depreciation due to revaluation;
- Dt 05 – Kt 04 – disposal of property as a result of its liquidation, write-off or sale.
Examples of operations for the wear of intangible assets
In order to more clearly consider each of the existing methods for calculating the designated category of company expenses for intangible objects, we will give one of the practical examples.
Let’s imagine that a certain organization has created a software product, the initial cost of which was 120.0 thousand rubles. Its useful life is defined as 5 years. In this case, the depreciation rate is 20% (100%:5).
If the organization chooses the straight-line method, then the annual depreciation amount will be 24.0 thousand rubles.
If the choice fell on the declining balance method, then the annually accrued amount of depreciation will look like this:
- 1 month – 120.0 thousand rubles x 3/60 = 6.0 thousand rubles;
- 2 month – 114.0 thousand rubles x 3/59 = 5.8 thousand rubles
Conclusion
Thus, it is very important that depreciation on intangible assets is accrued in accordance with applicable rules. This will allow gradually recovering all the costs of creating this particular object.