Software development
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
12 September 2013
if a pvt limited company which carrying out a business of software development is doing indirect expenses such as rent of the premises, remuneration to director, electricity expenses, etc, then we have to take these expenses in indirect expenses or we have to show them in fixed assets as software develpment expense and capitalize it
12 September 2013
It should not be capitalised. It shoulb be treated as expenditure and shown in the P&L A/c under proper head.
Querist : Anonymous
Querist :
Anonymous
(Querist)
12 September 2013
dear nishchit sanghavi,
but according to AS-26 if the company is in development stage then the expenses incurred by the company for the development of software ( intagible assets ) has to be capitalized.
kindly reply
but according to AS-26 if the company is in development stage then the expenses incurred by the company for the development of software ( intagible assets ) has to be capitalized.
kindly reply
25 July 2025
Great point! You’re referring to **Accounting Standard 26 (AS-26) — Intangible Assets**, which deals with how to treat expenses related to software development.
---
### Here’s the distinction based on AS-26 and usual accounting practice:
#### When to **capitalize software development costs** as intangible assets:
* The software is **in development stage** and
* The company can demonstrate:
* Technical feasibility of completing the software so it will be available for use or sale,
* Intention to complete and use/sell it,
* Ability to use or sell it,
* The software will generate probable future economic benefits (e.g., expected sales or internal use),
* Availability of resources to complete the development,
* Ability to measure reliably the expenditure attributable to the software during its development.
If all above conditions are met, then **directly attributable expenses** related to software development should be **capitalized** as an intangible asset.
Typical capitalizable costs include:
* Salaries of software developers working on development,
* Cost of materials and services directly related to development,
* Interest on borrowings if any related to the development,
* Costs of testing, coding, and other directly related costs.
---
#### What about **indirect expenses** like rent, electricity, and director remuneration?
* **If these expenses are directly related and attributable to the software development project**, they can be capitalized as part of the cost of the intangible asset.
* However, **general overheads or indirect expenses that cannot be directly linked to the software development project** are usually **expensed in the Profit & Loss (P\&L) account**.
Example:
* Rent of office premises where the entire company works: generally treated as indirect expense.
* Electricity bills for development department: can be capitalized if clearly identifiable.
* Remuneration to directors: if director is actively involved in software development, their salary related to development may be capitalized; otherwise, treated as indirect expense.
---
### Summary:
| Expense Type | Treatment |
| ------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------- |
| Direct costs for software development (coding, testing, salaries of dev staff) | Capitalize as Intangible Asset (AS-26) if criteria met |
| Indirect expenses (general rent, electricity, admin overheads) | Expense in P\&L under appropriate heads unless directly attributable to development |
| Director remuneration | Capitalize portion related to software dev only, else expense |
---
### Practical notes:
* Many companies capitalize only the **directly attributable costs** and expense indirect/general overheads.
* Ensure clear documentation and allocation for costs to avoid confusion during audit.
* Capitalization stops once software is ready for use.
* After capitalization, amortize the intangible asset over its useful life.
---
If you want, I can help you draft a sample policy or journal entries related to capitalization of software development costs. Would that be helpful?
---
### Here’s the distinction based on AS-26 and usual accounting practice:
#### When to **capitalize software development costs** as intangible assets:
* The software is **in development stage** and
* The company can demonstrate:
* Technical feasibility of completing the software so it will be available for use or sale,
* Intention to complete and use/sell it,
* Ability to use or sell it,
* The software will generate probable future economic benefits (e.g., expected sales or internal use),
* Availability of resources to complete the development,
* Ability to measure reliably the expenditure attributable to the software during its development.
If all above conditions are met, then **directly attributable expenses** related to software development should be **capitalized** as an intangible asset.
Typical capitalizable costs include:
* Salaries of software developers working on development,
* Cost of materials and services directly related to development,
* Interest on borrowings if any related to the development,
* Costs of testing, coding, and other directly related costs.
---
#### What about **indirect expenses** like rent, electricity, and director remuneration?
* **If these expenses are directly related and attributable to the software development project**, they can be capitalized as part of the cost of the intangible asset.
* However, **general overheads or indirect expenses that cannot be directly linked to the software development project** are usually **expensed in the Profit & Loss (P\&L) account**.
Example:
* Rent of office premises where the entire company works: generally treated as indirect expense.
* Electricity bills for development department: can be capitalized if clearly identifiable.
* Remuneration to directors: if director is actively involved in software development, their salary related to development may be capitalized; otherwise, treated as indirect expense.
---
### Summary:
| Expense Type | Treatment |
| ------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------- |
| Direct costs for software development (coding, testing, salaries of dev staff) | Capitalize as Intangible Asset (AS-26) if criteria met |
| Indirect expenses (general rent, electricity, admin overheads) | Expense in P\&L under appropriate heads unless directly attributable to development |
| Director remuneration | Capitalize portion related to software dev only, else expense |
---
### Practical notes:
* Many companies capitalize only the **directly attributable costs** and expense indirect/general overheads.
* Ensure clear documentation and allocation for costs to avoid confusion during audit.
* Capitalization stops once software is ready for use.
* After capitalization, amortize the intangible asset over its useful life.
---
If you want, I can help you draft a sample policy or journal entries related to capitalization of software development costs. Would that be helpful?
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