Accountancy · Ch 7 — Depreciation, Provisions and Reserves
Expiration of Legal Rights
Expiration of Legal Rights
Concept First
A business can own an asset even when it does not physically hold it. Some assets are valuable only because of a legal agreement — a patent, a copyright, a lease. The moment that agreement expires, the asset becomes worthless. Its value does not fade gradually; it vanishes all at once. This is not like a machine that wears out over years. It is a sudden, complete loss of utility.
Accountants must recognise this. The cost of such an asset must be fully written off by the time the legal right ends. That is done through depreciation — but here, depreciation is not about wear and tear. It is about matching the cost of the right with the period over which the right is held.
The Core Idea
Certain assets derive their entire value from a legal agreement. When that agreement ends, the asset ceases to have any economic benefit for the business. The asset is, in effect, extinguished.
Examples given in the book are:
- Patents — the exclusive right to manufacture or sell an invention, granted for a fixed period.
- Copyrights — the exclusive right to reproduce and sell a literary, musical, or artistic work, also for a fixed period.
- Leases — the right to use a property for a specified number of years.
In each case, the business does not own the underlying physical thing permanently. It owns a right to use it. Once the period of the agreement is over, the right is gone.
Accounting Treatment
Because the asset's useful life is known exactly at the time of purchase — it is the term of the legal agreement — the business must spread the cost of the asset evenly over that period. This is done by charging depreciation each year.
The journal entry for annual depreciation is the same as for any other depreciable asset:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Depreciation A/c ………Dr. | (amount) | |||
| To Asset A/c (Patent/Copyright/Lease) | (amount) | |||
| (Being depreciation charged on the asset for the year) |
At the end of the asset's legal life, the asset account will show a zero balance — its cost has been fully absorbed as depreciation expense over the years.
The key distinction: for assets like plant and machinery, the useful life is an estimate. For patents, copyrights, and leases, the useful life is fixed by the legal agreement. There is no guesswork. The entire cost must be written off by the expiry date.