Video: Software Created for Internal Company Use

In this lesson, delve into the intricate accounting rules for software developed not for sale, but for a company's internal use—a frequent practice in many businesses. Nick Palazzolo, CPA, crisply unpacks the process of differentiating between expenses for development, maintenance, and training, and the capitalization of costs post-technological feasibility, as well as for upgrades and enhancements. The lesson further navigates the waters of amortization, highlighting its straight-line method typical for intangible assets. Lastly, Nick explains a unique scenario: how to account for revenue when internally developed software is later sold externally, a practice exemplified by major tech firms. This insightful overview offers valuable comprehension of a complex area of accounting that intertwines technological innovation with financial practice.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Now, what about software created for internal company use? All right, so this is not software that we're going to be selling. We are creating this internal software, which happens a lot. A lot of companies create their own software. My firm, when I was back in the big four, there were plenty of internally created softwares.

And how do we account for those? Well, okay, accounting for costs, we expense costs incurred for the development and costs incurred for training and maintenance, because same thing, right? This is the same thing that we've seen over and over is that these don't go directly into the technologically feasible product. And then you capitalize costs incurred after technological feasibility and for upgrades and enhancements. Just like for fixed assets, you capitalize costs for upgrades and enhancements.

These include direct cost of materials and services. Makes sense. Costs of employees directly associated with the project after technological feasibility and interest costs incurred for the project. Awesome. How do you amortize?

Well, we've seen amortization before and amortization is great because it is straight line. It's the same concept, same idea, same everything as depreciation. We just have it for intangibles and it is straight line. Technically, yes, it could be another method other than straight line. But for the purposes of the test, we're in luck.

We are going to see just straight line. All right. How do we recognize revenue here if software previously developed for internal use is subsequently sold to outsiders? So let's say Microsoft's Office was initially used just in house at Microsoft, but then they decided to sell it to customers. Any proceeds received from the licensing of the computer software should be applied to the carrying amount of the software and then recognized as revenue after the carrying amount of

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Module: 8 Concepts, 74 Videos

Accounting Changes and Error Corrections Overview and Objectives

1:31

Types of Accounting Changes

2:56

Changes in Accounting Principle

3:38

Changes in Accounting Estimate