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for example-
Contract is made by the developing org. that they will develop it within4 years. For which they will charge CU Four million, each year CU One million.
Now tell me what will be the accounting entry for every year?
As the asset (computer software) being developed meets the requirements of an intangible assets, the one million will be capitalized on an annual bases as an intangible asset however will not be amortized until the asset is ready to be bought into use (one the development of the asset is completed)
The following entry will be processed until the asset is available for use:
Dr Intangible asset
Cr Creditor/ Bank
The accounting software meets the definition of an intangible asset.
The costs per year should be capitalised as follows:
Dr Intangible asset: Accounting software CU1 million
Cr Bank/cash/supplier CU1million
According to IAS, intangible assets, there are certain costs incurred in the development phase of an intangible asset which may not be capitalised and hence these costs would have to be expensed. A thorough inspection of all costs must be performed to identify which costs may be capitalised or expensed.
Once the intangible asset is ready for use, amortization should occur.
One has to also consider the below:
- If the software is being developed to be sold by the developing org? If so, no amortisation will occur and the company will record a sale when the intangible is ready for use/sale.
- As the development is over a period of4 years, one must consider an impairment based on the long duration of the development, especially as accounting standards change and could have an impact on change development.
the accounting entry for the cost arising for developing an Accounting software should be below
Debit IT Infrastructure
and Credit Accounts Payable or Bank Account
research and development expense
According to IAS- Development cost should be included in the cost of asset but we have to identify which cost is a development cost or whether it is an expense. So according to information provided in this question at each year end we include1m to the cost of software until the software developed in the fourth year.
The entry will be Debit software with1m each year and Credit Cash/Bank/Supplier..
Amortisation starts when software is developed after four years even when it is actually being used or not
