We discuss the pros and cons of capitalizing software development costs in a case study comparing side-by-side financial statements of a business that does it vs. does not.
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A lot of founders ask me about if they should capitalize software development costs to the balance sheet – historically everyone did this but the thinking on this has recently changed. There are some advantages to doing it, namely that it makes your P&L look “better” in the short term (and the opposite long term), but the disadvantages generally outweigh the advantages.
The biggest consideration is whether you want the tax shield of the expense now or later.
In this video I compare the three financial statements for an identical company that capitalizes software development vs. doesn’t capitalize it.
Sections:
0:27 how / why businesses accounted for software development historically vs. today
3:43 side-by-side comparison of business that capitalizes vs. doesn’t
5:18 income statement impact of capitalizing software development
9:00 balance sheet and cash flow impact of capitalizing software development
By the end of this video, you’ll have a much better understanding of how software development capitalization affects businesses – I guarantee it.
If you have questions – leave a comment below and I’ll try to help. Cheers!
#softwarecapitalization #startups #finance
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