How Should Research and Development Costs Be Recorded?

Let us learn about the answer to the question, “How should research and development costs be recorded?” Tune in to find out.

How Are Research and Development Costs Recorded?

Research and development costs in a company are recorded by a process called expense. 

Expensing means that in a given year, when the cost is incurred, it’s immediately recorded as an expense.

What this means is that if your company is currently paying for items such as salaries, office space, and other general operating costs, the cost of doing research and development will be part of those expenses. 

In other words, it will be part of the cost of doing business.

The logic behind this method of accounting is that companies should record research and development costs in the same way they record any other cost of doing business. 

Why should the accounting treatment be any different? After all, companies can’t sell research and development.

It’s an intangible asset. What good does it do to record the costs when they’re incurred?

These are all good questions. 

But in this case, accounting professionals have determined that expense is the proper treatment of research and development costs.

By recording them when they’re incurred, it makes it much easier to compare this year’s R&D expenses with last year’s, and the year before that. It also makes it easier to compare your company’s R&D expenses with other companies in your industry.

Benefits of Research and Development

Research and development also provide some significant benefits, which we can summarize as follows:

The development of new products and services

This is the primary benefit of research and development. If a company is able to develop a new product or service, its sales will increase significantly. 

The time it takes to bring the product or service to market will be much shorter than if the company didn’t engage in R&D activities. 

There’s also the possibility that the company will be able to develop an entirely new product or service that it can sell for a much higher price. 

Reduced costs of production

A company can also use R&D to reduce its costs of production. Reducing your costs of production will result in higher profits for your company.

For example, if your company is currently using a low-cost production process, you could develop a new process that costs much less. 

Or if your company is currently using an expensive production process, you could develop a new process that costs much less. 

The end result of developing a new production process is that you’ll be able to reduce the price of your product and still make a higher profit.

Better quality products and services

Another benefit of research and development is the possibility of developing products and services with better quality. 

The end result is that customers will be more willing to pay higher prices for products or services with better quality.

Better market share for your company

Finally, research and development can help your company to attain a greater market share in its industry. This means more sales and better profits for your company.

As a result, your company will probably be able to charge a higher price than your competitors. If your competitors are unable to match the price of the new product or service, they may lose customers to your company.