should research and development be capitalized

Should Research and Development Be Capitalized?

Should research and development be capitalized? Let’s delve deeper to find out.

What Is Research and Development?

Research and development is a huge part of running a business. Research and development, or R&D, is a business’s attempt to build a new product or service.

This process can take many months, and it involves many people from all over the company. R&D can also result in failed products. 

This means that the company has spent money developing something that doesn’t work as intended, or that has flaws that can’t be fixed.

Because of this, many small businesses don’t see the need to capitalize on R&D costs. They feel as though R&D costs are nonnegotiable because they’ll always need to develop new products and services.

However, there are many large businesses that capitalize on R&D costs. 

Should Research and Development Be Capitalized?

Research and development expenses include all costs that pertain to creating a new product or service for your business. 

If you’re spending money on developing a new product, then you should capitalize on these costs because they can potentially create a profit for your company in the future. 

Part of accounting is being able to predict whether or not your company can make a profit from an investment in research and development. 

If the investment in research and development is going to yield future revenue, then it should be capitalized. 

However, if there is no expectation of future revenue from the investment, then it shouldn’t be capitalized.

Let’s say you decide to create a new line of hair products. 

You must decide whether or not you want to capitalize on the costs associated with creating the new hair products. 

Because creating these new hair products can generate future revenue, you should capitalize on the costs of research and development.

You’ll then start to expense these costs as you use them up. 

Using the same scenario, let’s say you spend $20,000 on research and development but there is no expectation of future revenue. 

In this case, you should not capitalize on these costs because they aren’t expected to generate a return on your investment. 

Instead, you’ll recognize the costs as they are used up or come due.

When Should You Capitalize R&D? 

You should capitalize costs associated with developing a new product or service if your business expects to generate future revenue from those items.

Capitalizing R&D will also allow your business to predict how much it will cost to create new products and services as well as how much those items will cost.

You should not capitalize costs if your business does not expect to generate future revenue from the new product or service. 

This may happen if your business will use the item internally and won’t resell it.

Conclusion

Research and development is a huge part of running a business, but it can be confusing to determine whether or not these costs should be capitalized. 

To help you determine whether you should capitalize R&D costs, ask yourself if your business expects to generate future revenue from the product or service being developed. 

If so, then you should capitalize on the costs associated with developing these items. If not, then you shouldn’t capitalize on the costs.

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