I have renewed my business license few days ago, but I don’t understand how to post it in the system. When I did my license for the first time in last year, I posted it in ‘License’ under ‘Intangible Assets’ tab. So please advice me how & where I should post my yearly renewal expenses in your manager software.
In the Chart of Accounts create an Expense account named something like “Licenses”. Post the renewal to that account.
I don’t think a yearly license should be an intangible asset, but @Brucanna may reply with a more expert opinion.
@naimfaisal - you answered your own question when you stated “yearly renewal expenses”. You post it as an expense - it is a cost of running the business, without the license the business can’t operate. That should have also applied to the first year’s license.
The license is not an Intangible assets, like goodwill, registered trademark or product patent which you could sell in the future. An authorities issued business license (registration) is not a saleable item, its a right to operate.
Thanks for your kind answer. But I have a different opinion with your thinking. I think a company of 1 year age might have no value, but a company of 10 years age must have a value according to their goodwill over the year. So after 10 years if that company going to sell then according to their goodwill then its license value will must make a different. What then will be your say? One more thing, please tell about company domain and hosting renew yearly, which account this belongs to?
My accountant once said to me that what I think does not change recognized accounting standards and norms, and tax authority rules. It is those things that determine if an expenditure is and on-going expense, intellectual property, or capital expense. So if you are not sure you must ask an accountant. Accountants spend years studying the rules.
Same thing: those are on-going expense that go into an expense account.
You should also be aware that if these type of expenses could be capitalized, then they would not be fully deductible on your taxes in the year that you paid them. It does not make sense to not deduct all the expenses that you are entitled to. Speak to your accountant.
@dcVest is right. Company valuation and financial accounting are separate things. Intangible asset accounting is a way of recovering costs of certain types of assets over time. It has no direct connection with what a company may or may not be worth, with is set by what a buyer is willing to pay for it.
Yes, it may have a value of goodwill, but that goodwill has nothing to do with the renewal of the business license. The business license gives you a right to operate the business. What happens if you close down (not selling) the business after 5 years, what then happens to that Intangible Asset ?
A buyer may pay goodwill to acquire a business and in that purchase the business license maybe transferred (similar to a property rental being transferred) but that doesn’t give the business license (property rental) it self any value - e.g. the buyer may already have their own business license so your business license is redundant - what then for the Intangible Asset ?
If you paid for your company trade license it should be recorded as an expense for licensing account, and be sure if this license is valid for next year also, you should follow the accrual basis Accounting like, supose the expense for trade license is 10,000 and current month is june, 30, you will record: (1) current year:
expense for licensing a/c 5,000 Dr
Prepaid expense a/c 5,000 Dr
Cash a/c 10,000 Cr
(2) next year :
Expense for license a/c 5,000 Dr
Prepaid expense a/c 5,000 Cr
Hope you would understand!