University Finance Report: Management Accounting of Software Costs

This report delves into the intricacies of management accounting, specifically focusing on the accounting treatment of software costs. It outlines the various phases of software development, including market research, design, coding, and staff training, assigning values to each component. The report then details the appropriate accounting treatments for these components, differentiating between assets and expenses and providing journal entries for each phase. It discusses the impact of internal use software, emphasizing the importance of technical feasibility and the stages of production and release. The report highlights the complexities of accounting for internally developed software and stresses the need for detailed record-keeping and professional advice, concluding with a bibliography of relevant sources.

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student:
Name of the University:
Author’s Note:

1MANAGEMENT ACCOUNTING
Table of Contents
Phase & Values of Components:.....................................................................................................2
Accounting Treatment for the Components:...................................................................................2
Bibliography:...................................................................................................................................4

2MANAGEMENT ACCOUNTING
Phase & Values of Components:
Phase I: Value Type
Market Research $1,00,000 Assets
Listing of Software Requirements
Analysis of Market Research
Selection of Best Option
Capital Procurement
Phase II:
Designing Software Configuration
$25,00,00
0 Asset
Coding $4,00,000 Asset
Installation of Hardware
$35,00,00
0 Asset
Testing of Application
Phase III:
Training of Staffs $65,000
Expense
s
Maintenance of Server &
Application $50,000
Expense
s
Upgradation, when required $1,00,000 Asset

3MANAGEMENT ACCOUNTING
Accounting Treatment for the Components:
Dr. Cr.
Date Particulars Amount Amount
Phase I:
Market Research Cost A/c. Dr. $1,00,000
To, Cash at Bank A/c. $1,00,000
Preliminary Expenses A/c. Dr. $1,00,000
To, Market Research Cost A/c. $1,00,000
Cash at Bank A/c. Dr.
$66,15,00
0
To, Share Capital A/c.
$33,07,50
0
To, Loan from Bank A/c.
$33,07,50
0
Phase II:

4MANAGEMENT ACCOUNTING
Software Design A/c. Dr.
$25,00,00
0
Coding A/c. Dr. $4,00,000
To, Cash at Bank A/c.
$29,00,00
0
Software Application A/c. Dr.
$29,00,00
0
To, Software Design A/c.
$25,00,00
0
To, Coding A/c. $4,00,000
Computer Equipment A/c. Dr.
$35,00,00
0
To, Cash at Bank A/c.
$35,00,00
0
Phase III:
Training & Development Cost A/c. Dr. $65,000
Maintenance of Server & Application
A/c. Dr. $50,000
To, Cash at Bank A/c. $1,15,000

5MANAGEMENT ACCOUNTING
Upgradation Expenses A/c. Dr. $1,00,000
To, Cash at Bank A/c. $1,00,000
Profit & Loss Statement A/c. Dr. $1,15,000
To, Training & Development Cost A/c. $65,000
To,
Maintenance of Server & Application
A/c. $50,000
Software Application A/c. Dr. $1,00,000
To, Upgradation Expenses A/c. $1,00,000
There are significant numbers of factors that have direct impact on the treatment of
internally developed software costs in an organisation. Thus, for capitalisation of the internally
developed project costs, it is necessary to understand internal use developed software. According
to “Accounting Standards Codification- ASC 350-40”, internal use implies the software, which
has been established solely for internal use and no intention is present for selling, marketing or
leasing the software (Cañibano 2017). The development stage needs to determine whether the
expenses need to be capitalised or expensed. In the preliminary stage, the related costs need to be
expensed at the time they are incurred. The cost of application spent in the stage of development,
which constitute of internal expenses and those paid to the external parties, need to be amortised
and capitalised in accordance with the above section. Once the development of the product is
over, the cost of maintaining and training others to use the same needs to be expensed. This is the

6MANAGEMENT ACCOUNTING
place when stuffs are complex in ascertaining the way of treating the software development cost.
The internal use software includes various stages:
Technical feasibility:
According to “Statement 86 of Financial Accounting Standards Board (FASB)”, the
costs that are spent for establishing the technical viability of computer software product are the
research and development costs. This standard defines technical feasibility as at the time
planning, designing, coding and testing have inferred and the product could be manufactured
(Harrington 2016). The costs up to this point need to be expensed, as they are adjudged in the
form of research and development costs.
Production:
After the establishment of the technical feasibility, the stage of production takes place.
The costs related to the actual production of the software product need to be capitalised. The
amortisation starts at the time the product is ready to be released (Kneţević and Mitrović 2015).
Release:
` At the time the product is available for release to the customers, there are ceases in the
overall cost capitalisation. From this point forward, all the costs are required to be expensed for
the current product. These costs constitute of customer support and maintenance by bearing in
mind the product variations, which might need the process to start from the initial stage
(Sougiannis 2015).
The above overview has clearly inherited the fact regarding the ways complex accounting
could be for costs related to internally developed software and the significance of expert advice.

7MANAGEMENT ACCOUNTING
Along with this, there needs to be preservation of detailed records and most significantly, the
organisation needs to contact its accountant at the start of the process. The costs related to
backtracking, restating financial statements and filing accurate tax returns could add to the
process.