Accounting of Intangible or intellectual property

LarryZdanis

Hi, I'm new to accounting.. I read Wave's Fearless Accounting Guide (impressed). I understand the equation Equity = Assets - Liablities, and that with double-entry accounting there should always be one account "debited" and one "credited" in order to keep the equation 'balanced'. (1) However, I don't understand how intangible assets or intellectual property (IP) fit into this. Something like 'value of a trusted brand name' is something that grows slowly and shouldn't wouldn't seem to have a credit or debits associated with it (until a company issued a license or was sold, I suppose), so how/when do you add such value to your Assets? (2) Also, how would these be entered such they don't impact/reflect "profit", as companies are only required to pay tax on Cash profits. These are question maybe best left to an expert; otherwise we might go around in circles with lots of opinions.. but I figured I'd try posting.

AlexL

Hey @LarryZdanis , thanks for doing your homework and I'm glad to hear you loved reading Fearless Accounting, I know the colleague of mine that wrote it would love to hear this!

I'm afraid you may be correct in regards to the questions you're asking. These tend to be on the difficult side when it comes to Accounting and I'm afraid as we're not accountants, I wouldn't want to advise on something that may have greater ramifications on your books. I'd highly recommend reaching out to an accountant or CPA directly for these questions as they should be able to help you record this appropriately.

Mikeg

@LarryZdanis,
The adjustment of certain accounts that can have a value below/above the stated amount is a Generally Accepted Accounting Principle (GAAP) concept. It is used when financial statements are being created and issued by the company. So for example, Marketable Securities. Investments fluctuate on a daily basis. For tax purposes they are always stated at cost but for GAAP purposes they are reflected at fair market value. An account called Unrealized Gain or Loss on Marketable Securities is created as an asset to account for the difference between fair market value as of the date of the statement. Amounts are then debited or credited to the income statement based on value of the asset or liability. Another example would be accounts receivable and it's contra account Allowance for Doubtful Accounts. For tax purposes, only an actual bad debt is allowed to be written off (that is if you had recognized the revenue in a prior year, accrual basis for tax). For GAAP purposes an evaluation is performed to determine the likely value of Accounts Receivable. Any value less than the stated value would be a debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts.
I recommend staying from that and sticking with Cash basis accounting. If you ever need financial statements a lender providing significant financing would not accept what you print out. They would want the statement to be issued by a CPA. You would provide them with cash basis statements and from there they would make the adjustments to issue financial statements.