ASC 350-40: Journal Entries for Software Development Cost Capitalization
Posted In | ASC Education | Gridlex AcademyIn today's technology-driven business environment, internal-use software is increasingly essential for improving efficiency and productivity. ASC 350-40, Intangibles - Goodwill and Other - Internal-Use Software, provides guidance on accounting for the costs associated with developing or obtaining internal-use software. This article explains the capitalization of development costs for internal-use software under ASC 350-40, along with illustrative journal entries.
Understanding Internal-Use Software Development Costs
Internal-use software development costs refer to the expenses incurred during the development or acquisition of software intended for internal use, such as ERP systems or custom applications. ASC 350-40 divides the software development process into three stages: preliminary project stage, application development stage, and post-implementation/operation stage.
1. Preliminary project stage: Costs incurred during the conceptualization, evaluation, and selection of alternatives are expensed as incurred.
2. Application development stage: Costs related to software configuration, coding, testing, and installation are capitalized.
3. Post-implementation/operation stage: Costs incurred during training, maintenance, and minor updates are expensed as incurred.
Capitalizing Development Costs under ASC 350-40
ASC 350-40 allows the capitalization of development costs during the application development stage, while costs from the preliminary project stage and post-implementation/operation stage are expensed as incurred. Capitalized costs are amortized on a straight-line basis over the software's estimated useful life, typically ranging from 3 to 7 years.
Journal Entries for Capitalizing Development Costs
To illustrate the journal entries for capitalizing internal-use software development costs, let's assume a company incurs $50,000 in the preliminary project stage, $150,000 in the application development stage, and $30,000 in the post-implementation/operation stage. The estimated useful life of the software is 5 years.
1. Record the costs incurred during the preliminary project stage:
Dr. Research and Development Expense $50,000
Cr. Cash (or Accounts Payable) $50,000
2. Capitalize the costs incurred during the application development stage:
Dr. Internal-Use Software in Development $150,000
Cr. Cash (or Accounts Payable) $150,000
3. Record the costs incurred during the post-implementation/operation stage:
Dr. Software Maintenance Expense $30,000
Cr. Cash (or Accounts Payable) $30,000
4. Transfer the internal-use software to service:
Dr. Internal-Use Software $150,000
Cr. Internal-Use Software in Development $150,000
5. Record the annual amortization expense:
Dr. Amortization Expense $30,000 (Annual Amortization = $150,000 ÷ 5 years)
Cr. Accumulated Amortization - Internal-Use Software $30,000
ASC 350-40 provides guidance on capitalizing development costs for internal-use software, allowing companies to accurately account for their software investments. By understanding the stages of software development and the associated journal entries, companies can ensure proper accounting treatment and financial reporting for internal-use software. Proper accounting for these costs helps companies track the return on their software investments and make informed decisions about future software development or acquisition projects.