Should development costs (assets) also be shown in the Income statement?

[techie]

My software startup is creating an application and the development costs were taken as assets on the balance sheet to be able to match future revenues against input costs. So the balance sheet now shows the Development costs as assets.

My doubt is, should the same development cost also be reflected in the Income Statement (Expense: Development charges paid and Income: Work in Progress of the same amount) or is this step not required?

[accountantpete]

The answer is yes and no Techie.

The initial entries are simply debit the R & D asset account (on the balance sheet) and credit the purchase ledger (or wherever you posted the invoices for this expenditure).

If the costs of the R & D are a Revenue item then as they are matched with income that has been invoiced you simply credit the above asset account and THEN post to an expense account as a debit.

I would stop there and discuss the matter of W.I.P. with your accountant or failing that post a separate enquiry as it can be a complicated subject.

[James Smith]

You may also be eligible for R&D tax credits which are a marvelous little wheeze to put more money in your own pockets and less in that of the chancellors.

Again a decent accountant will be able to advise on this.

[techie]

James, thanks for the reply, we dont qualify for R&D yet...

accountantpete, thanks. I am not an accounts person, just trying to understand the same in my own way the issue is, until revenues are received, do the development costs remain just assets or are also brought to the PL account.

[accountantpete]

Yes leave them in assets until the income is received. One of the most important accounting principles is matching - in other words any income received should be matched with the expenses incurred in order to generate that income.

So for example if you bought 200 CD's for £200 and sold 150 for £500 the income and expenditure statement would read Income £500 and expenses of £150 because the matching principle dictates that the expense must relate to sales.

You deal with your development costs in the same way.The total expense that has been capitalised will need to be spread over the number of units you aim to sell in the future to give an average cost per unit and as and when they are sold that cost per unit is released into the profit and loss account.

Your only problem will be deciding how many units you will sell and so how far do you spread the development costs - there is no right answer so a realistic but cautious guess is required.