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Trademarks are symbols, logos and designs representing the goods or services associated with them. Trademarks are used by a company or business to identify its brand or entity. Trademark accounting means the accounting treatment of costs or expenses related to trademark development in a company’s books of account. It includes determining the trademark’s financial value for presenting it in the company’s balance sheet and other financial reports.
Trademarks are included in the balance sheet as intangible assets of a company or business. The trademark cost is capitalised or recorded as an asset on a company’s books of accounts using a standard journal entry. There are doubts that a trademark account is which type of account in India. A trademark is a fictitious asset; thus, it is a real account.
All intellectual property rights (trademark, patent and copyright) are a company’s intangible assets. Intangible assets have a financial value for a business despite the absence of physical attributes of tangible assets, such as machinery, land, etc.
Trademarks have a higher financial value attached to them than reflected in a company’s financial reports. The differences in the actual value and the value shown on the financial reports are because businesses can only include the trademark development cost in the books of accounts.
Generally, intangible assets are amortised over a period of their expected life. However, trademarks are not amortised as they retain their value forever. But a business should reassess its trademarks annually. When the value of its trademark has impaired compared to its value in the prior year, the business should readjust the trademark’s market value and record the difference as a financial loss.
Trademark registration prevents other entities from using the business’s name, brand or logo. They create an identity amongst customers and build impactful brand associations when advertised or promoted by the company. They establish certain expectations about the price and quality of the product or service of a business and distinguish them from its competitors.
A similar mark used for the services of a company is called a service mark. The accounting treatment of a service mark is the same as a trademark. Famous trademarks amongst customers are often known in the market as brands.
Trademarks are intangible assets of a business. A trademark is capitalised for the purpose of accounting. Capitalisation of trademarks or service marks means a business or company records them as assets in their books of accounts through a journal entry.
However, all development costs will not qualify for capitalisation of a trademark, such as a cost of creating the logo, and costs for advertising, are not eligible for capitalisation. Plus, a trademark which is internally generated cannot be capitalised. In India, the Accounting Standards (AS), generally accepted as accounting principles, govern the accounting treatment of intangible assets. AS 26 (Accounting for Intangibles) governs a company’s accounting treatment of trademark costs.
Acquired trademarks can be capitalised when it fulfils below criteria:
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