Lesson: Accounting for Research and Development

In this lesson, Nick Palazzolo, CPA, breaks down the principles of accounting for research and development (R&D) expenses, juxtaposing the processes of capitalization and expensing. He elaborates on the conditions under which a company would capitalize costs versus recording them as an expense, covering the implications for financial statements and the associated impact on a company's perceived financial health. Delving deeper into R&D specifics, Nick points out the only acceptable treatment for R&D costs, with an emphasis on the two exceptions to the rule: materials and equipment with alternative future uses, and contractual R&D undertaken for others. He rounds off the lesson with a discussion on the reasoning behind the predominant treatment of R&D costs as expenses, due to the uncertainty of future benefits, and highlights what costs are not considered R&D, like routine design changes and marketing research.