It may be challenging to find ways to improve profitability in this current economic cycle. While a business owner’s main focus is growing his or her business and achieving stronger operating results, there may be opportunities to take a closer look at some common business expenses. Specifically, some costs may meet the criteria for capitalization and could result in classification as assets on the balance sheet instead, rather than expensing them immediately when incurred.
Here are five costs to consider for capitalization that may improve the bottom line:
- Internal-Use Software Costs – Under certain circumstances, some costs relating to computer software developed or obtained for internal use may be capitalized instead of expensed. Costs eligible for capitalization generally include those incurred during the application development stage (excluding training costs and certain data conversion costs that should be expensed as incurred).
- Website Costs – Capitalization of these costs depends on the stage of website development. All costs incurred in the planning stage should be expensed as incurred. Certain costs incurred in the website application and infrastructure development stage may be capitalized under specific criteria. During the operating stage of the website, certain costs relating to upgrades and enhancements that add functionality may be eligible for capitalization.
- Interest Costs – The historical cost of acquiring an asset includes the costs necessarily incurred to bring the asset to the condition and location necessary for its intended use. If an asset requires a period of time in which to carry out the activities necessary to bring it to that condition and location, the interest cost incurred during that period as a result of expenditures for the asset is a part of the historical cost of acquiring the asset, so those costs should be capitalized as part of the asset cost.
- Debt Issuance Costs – Costs incurred in connection with obtaining financing may be capitalized and amortized over the term of the related debt. These costs generally include underwriting, legal, and other direct costs in connection with the issuance of debt. They should be included as deferred charges on the balance sheet instead of expensed as administrative costs.
- Advertising Costs – Some companies engage in direct-response advertising activities that could be reported as assets if certain conditions are met. Generally, the primary purpose of the advertising must be to elicit sales from customers who could be shown to have responded to the advertising, so that the advertising results in probable future benefits. Examples of such costs to capitalize may include idea development, advertising copy, artwork, printing, ad space, and mailing. The capitalized costs should be amortized over the expected period of future benefits.
In conclusion, there may be opportunities for companies to capitalize certain costs on their balance sheets instead of expensing those costs when incurred. As a result, the accounting treatment may result in an improved bottom line.
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