Large companies may spend significant amounts of money on research and development activities. These amounts must be credited to cash and debited to an account for research and development expenditure. The accounting problem is how to treat the debit balance on research and development account at the balance sheet date.
There are two possibilities.
- The debit balance may be classified as an expense and transferred to the profit and loss account. This is referred to as writing off then expenditure.
- The debit balance may be classified as an asset and included in the balance sheet. This is referred to as capitalizing or carrying forward or deferring the expenditure.
The argument for writing off research and development expenditure is that it is an expense just like rates or wages and its accounting treatment should be the same.
The argument for carrying forward research and development expenditure is based on the accruals concept. If research and development activity eventually leads to new or improved products which generate revenue, the costs should be carried forward to be matched against that revenue in future accounting periods.