A company’s intangible assets include anything that has value but that you can’t touch or spend: employees’ skills, customer lists, proprietary knowledge, patents, brand names, reputation, strategic strengths, and so on. Most of these assets are not found on the balance sheet unless an acquiring company pays for them and records them as goodwill. The exception is intellectual property, such as patents and copyrights. This can be shown on the balance sheet and amortized over its useful life.
Take a patent. Your company had to buy the patent, or it had to do the research and development that lies behind it and then apply for it. Now the patent is helping to bring in revenue. So the company must match the expense of the patent with the revenue it helps to bring in, a little bit at a time.
(Excerpts from Financial Intelligence, Chapter 8 – Costs and Expenses)
Amortization is the same basic idea as depreciation, but it applies to intangible assets. These days, intangible assets are often a big part of companies’ balance sheets. Items such as patents, copyrights, and goodwill are all assets – they cost money to acquire, and they have value – but they aren’t physical assets like real estate and equipment. Still, they must be accounted for in a similar way.