Let us first understand the concepts of Amortization and Impairment. Amortization refers to the expense recorded on the decline of the value of intangible assets of a company. Intangible assets include goodwill, patents, copyrights, etc. It reflects the reduction in the value of Intangible assets ovRead more
Let us first understand the concepts of Amortization and Impairment.
Amortization refers to the expense recorded on the decline of the value of intangible assets of a company. Intangible assets include goodwill, patents, copyrights, etc. It reflects the reduction in the value of Intangible assets over its life span.
Amortization is similar to Depreciation, however, while depreciation is over tangible assets amortization is over Intangible assets of the company.
For example, Cipla Ltd. acquired a patent over a new drug for a period of 10 years. The cost of creating the new drug was 80,000 and the company must record its patent at 80,000. However, the company must amortize this cost by dividing the cost over the patent’s life, i.e., the amortization cost would be 8,000 (80,000/10) p.a. for the next 10 years.
Impairment means a decline in the value of fixed assets due to unforeseen circumstances. Assets are impaired when the carrying value of assets increases its market value or “realizable value” and such increase is recorded as an impairment loss.
Now suppose, Cipla Ltd. had existing machinery which suffered physical damage and is recorded at 50,000 in the books but the realizable value of the asset would only be 20,000. Hence, the asset would be written down to 20,000 and an impairment loss of 30,000 will be recorded.
Impairment Vs Amortization
Differences between the two can be shown as follows:
| Amortization | Impairment |
| Amortization is a reduction in the value of Intangible Assets over their useful life. | Impairment is a reduction in the value of assets due to unforeseen circumstances. |
| Amortization is a continuous process and the value of an asset reduces over time. | Value of asset reduces drastically, creating a need to write down the value to its fair market value. |
| Amortization is charged annually. | Impairment is not an annual charge. |
| Amortization is shown as an amortization expense. | Impairment is shown as an impairment loss. |
| Reasons for amortization includes consumption, obsolescence, etc. | Reasons for impairment include damage to the asset, change in preferences, etc. |
| Amortization is charged on Intangible assets | Impairment is charged on fixed assets whether tangible or intangible. |
Suppose Unilever Ltd. has a patent over one of its products for a period of 5 years. The cost of the patent was 1,00,000. Then after 2 years one of its rivals, say ITC Ltd., launches a new product which is more preferred by the consumers over the one produced by Unilever Ltd. and the fair market value of the patent of Unilever Ltd. changes to 10,000.
Now in this scenario, Unilever Ltd. would have amortized the patent (costing 1,00,000) at 20,000 (1,00,000/5) p.a. for 2 years and the book value at the end of the 2nd year is 60,000 (1,00,000 – 40,000). Now due to the new launch by ITC Ltd. the drastic change in the value of the asset from the book value of 60,000 to the realizable value of 10,000 will be recorded as an Impairment loss. Hence Impairment loss would be recorded at 50,000 (60,000 – 10,000).
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The debts that have a higher chance of not being paid are called doubtful debts. They are a part of the regular dealing of the company and may arise due to disputes or treachery on the part of debtors. Bad debts refer to the doubtful debts that no longer seem to be recoverable from the business. WriRead more
The debts that have a higher chance of not being paid are called doubtful debts. They are a part of the regular dealing of the company and may arise due to disputes or treachery on the part of debtors.
Bad debts refer to the doubtful debts that no longer seem to be recoverable from the business.
Written off means an expense, income, asset, liability is no more recorded in the books of accounts because they no longer hold relevance for the business.
When doubtful debts turn into bad debt, they are written off from the books after a stipulated time as they no longer seem recoverable.
If any cash is received against such bad debts that were written off, it is known as cash received against bad debts written off. Cash is received against bad debts usually when the debtor is declared insolvent and money is recovered from its estate.
Bad debts recovered are considered an income for the company as they were previously written off as a loss and any cash received against it is considered as income.
Journal entry for such situation is:
Cash or Bank A/c (Dr.)
To Bad Debts Recovered A/c
We debit the increase in assets, and since cash is coming into the business it is debited.
We credit the income, and since bad debts recovered is an income to the business it is credited.
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