Expenses Capitalising

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rutuja prabhune (Querist)
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09 August 2024 A Pvt Ltd company is still in R & D and Prototyping phaze, so capitalising it's all expenses but in same phaze company received an order and ready to pay 100 % against PI,and sale is not yet done or booked (sale invoice), in this case can company still continue capitalsing expenses? And at exactly what stage company should stop capitalising R & D expenses i.e. when received PO, company raises PI, received money from customer, raises sales invoice or when actual sales, please guide

Aashok Kumar Sharma online

Aashok Kumar Sharma

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13 August 2025 Capitalizing R&D Expenses — Key Points:
Capitalization during R&D and Prototyping Phase:
Generally, R&D expenses can be capitalized if they meet the criteria of intangible assets under accounting standards (e.g., Ind AS 38 / IAS 38).
Capitalization means treating those expenses as an asset on the balance sheet (e.g., “Intangible Assets - Prototype”) instead of immediate expense.
These costs should be directly attributable to creating an asset that will generate future economic benefits.
When to Stop Capitalizing?
Capitalization of R&D expenses should stop when the asset is ready for its intended use or when the company starts commercial production/sale.
Key milestones that usually indicate the stop point:
Order received (Purchase Order / PO) — signals intent but not the actual sale or commercial use.
Proforma Invoice (PI) raised — still pre-sale stage.
Sales Invoice raised or actual sale booked — suggests commercial exploitation started.
Receipt of payment — financial milestone but may be before sales.
Among these, the best practice is to stop capitalizing expenses when the asset is ready for commercial use or actual sales invoice is issued, as this indicates the R&D phase is over and commercial phase has begun.
Your Scenario:
The company is still in R&D/prototyping but has received an order and raised PI, payment received.
Since actual sales invoice is not yet raised, technically the R&D phase may still be ongoing.
However, if the order implies commercialization, you should assess whether the asset is ready for intended use.
If yes, then stop capitalizing and start expensing ongoing costs.
If no (e.g., prototype still being tested), continue capitalizing.

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