How to Record a Patent in Accounting

What is a Patent?

A patent is an exclusive right granted by a government to an inventor or their assignee for a limited period of time, typically 20 years. It gives the owner the sole right to make, use, sell, or license the invention.

Accounting Treatment of Patents

Patents are classified as intangible assets on the balance sheet. They should be recorded at the cost of acquisition or development.

The cost of a patent includes:

Legal and filing fees
Research and development costs
Cost of defending the patent

The cost of a patent should be amortized over its useful life, which is typically 20 years. Amortization is a non-cash expense that reduces the carrying value of the patent on the balance sheet.

Financial Statement Impact

Recording a patent in accounting has the following financial statement impacts:

Balance sheet: The patent is recorded as an intangible asset.
Income statement: Amortization expense is recorded as a non-cash expense.
Cash flow statement: No cash is paid or received when a patent is recorded or amortized.

Steps to Record a Patent

The following steps can be followed to record a patent in accounting:

Determine the cost of acquisition or development.
Debit the Intangible Assets account and credit Cash or Accounts Payable for the cost.
Establish an amortization schedule for the patent.
Record amortization expense on a regular basis (typically monthly or annually).

Conclusion

Recording patents in accounting is important for accurately representing a company’s financial position and performance. By following the steps outlined above, companies can ensure that their patents are properly accounted for.

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