Accounting for software development expense

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Resources Case Studies Events and Webcasts. Software development expenses are categorized by what stage of the development process they were incurred. Generally, planning and testing costs necessary to establish that the product can be produced to meet its design specifications or maintenance costs are considered operating expenses.

Development costs incurred after technological feasibility has been established and before market release are considered capital expenditures. Any software development costs for improvement beyond the original offering that are incurred after the software is available for sale are capitalized according to the same timeline as an entirely new product, but routine maintenance and alterations costs are considered operating expenses according to GAAP.

GAAP-based cost accounting for software development can be particularly cumbersome in agile development environments due to the more rapid change, iteration and feature-by-feature processes; small windows of opportunity for capitalization present themselves during agile development.

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Finance Interview Prep. Corporate Training. Technical Skills. View all Free Content. Learn Online Now Link Copied! Table of Contents When can a company capitalize software costs? Software developed for internal use Software that companies sell or market to the public Software costs that qualify for capitalization Benefits of capitalizing software How much leeway do companies have in deciding what to capitalize vs expense Capitalized software development costs, an example.

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