Lesson: Expensing Versus Capitalizing Software Costs

In this lesson, Nick Palazzolo, CPA, tackles the nuanced topic of whether software costs should be expensed or capitalized, outlining the critical decision-making points through each stage of development. He elucidates the concept by distinguishing costs incurred before reaching technological feasibility—which must be expensed—from costs incurred post-technological feasibility, which are instead capitalized and added to the asset's value on the balance sheet. Nick highlights the repercussions each choice has on a company's financial statements, emphasizing the accountant's responsibility in accurately presenting these figures for the users of the financial statements. Visual aids are used to clarify the transitions between the different stages of software development, reinforcing the importance of proper categorization of software costs.