Intangible assets vs. prepaid expenses

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badal kansal (Querist)
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12 February 2013 Hi,,,

Anyone can tell me
company bought a Sonic firewall (software) costing Rs. 70,000 with economic life of 3 years which is mentioned by vendor in their invoice and company has booked all 70000 in the year of purchase in profit & loss account instead to defer or other

now i want to know what should be the accounting treatment
whether it should have been comes under As 26 Intangible assets and amortised over three years of life or any other accounting treatment will be permissible

Sanjay Chauhan (IFRS)

Sanjay Chauhan (IFRS) (Expert)
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13 February 2013 Softwares will form part of AS 26 Intangible assets and have to be depreciated over a period not exceeding 3 years. If this software fulfills the useful definition relative to the industry, then it should be amortised.

Regards,

badal kansal

badal kansal (Querist)
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13 February 2013 thank you sanjay..... but do you mean by if the software fulfils useful definition relative to the industry.

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badal kansal

badal kansal (Querist)
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14 February 2013 thank you sanjay..... but do you mean by if the software fulfils useful definition relative to the industry.

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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01 August 2024 In accounting, the treatment of a Sonic firewall software costing Rs. 70,000 with an economic life of 3 years depends on the nature of the asset and the applicable accounting standards. Here’s how you should handle it:

### 1. **Accounting Treatment under AS 26 (Intangible Assets)**

**AS 26 - Intangible Assets** provides guidance on the accounting treatment for intangible assets. According to AS 26, intangible assets are defined as non-monetary assets without physical substance but provide economic benefits to the entity.

**For Software Costs:**
- **Initial Recognition:** Software purchased, such as the Sonic firewall, which is intended to provide future economic benefits, should generally be classified as an intangible asset if it meets the definition of an intangible asset under AS 26.
- **Amortization:** The cost of the software should be capitalized and amortized over its useful economic life. In this case, since the vendor mentioned an economic life of 3 years, the software should be amortized over this period.

**Accounting Entry:**
1. **Capitalization of Software:**
```plaintext
Dr. Intangible Assets (Software) ₹70,000
Cr. Bank/Cash ₹70,000
```

2. **Amortization (annually for 3 years):**
```plaintext
Dr. Amortization Expense ₹23,333
Cr. Accumulated Amortization ₹23,333
```
*Here, ₹70,000 / 3 years = ₹23,333 per year*

### 2. **Prepaid Expenses vs. Intangible Assets**

**Prepaid Expenses:**
Prepaid expenses are costs paid in advance for goods or services that will be consumed over time. For instance, if you had paid for a service or a license for a shorter period (less than a year), it would be considered a prepaid expense.

**Intangible Assets:**
Since the Sonic firewall has an economic life of 3 years, it should be classified as an intangible asset rather than a prepaid expense. Prepaid expenses typically relate to shorter-term benefits, whereas intangible assets cover long-term benefits.

### 3. **Useful Definition Relative to Industry**

The software’s classification as an intangible asset is not dependent on the industry but on whether it meets the definition provided by accounting standards. If the software is expected to provide economic benefits over a period and has a measurable useful life, it should be classified as an intangible asset and amortized accordingly.

### **Summary**

1. **Capitalization:** The cost of the Sonic firewall should be capitalized as an intangible asset.
2. **Amortization:** Amortize the cost over its useful life of 3 years, as specified.
3. **Prepaid Expenses:** This treatment does not apply here as the software has a useful life extending beyond one year.

Ensure compliance with AS 26 for the correct accounting treatment. If the software provides economic benefits over several years, it should be amortized over its useful life rather than expensed in the year of purchase.