Research and Development Journal Entry
In business, research and development (R&D) is the process of creating new products or services or improving the existing ones. R&D can be conducted in-house or outsourced to a third party.
The goal of R&D is to increase a company’s competitiveness and profitability by developing new products or services that can be sold to consumers. R&D also helps a company stay ahead of its competitors by allowing it to experiment with new technologies and ideas.
In order to be successful, R&D must be guided by a clear strategy and executed with precision. A well-funded and well-executed R&D program can be a key for a company to maintain its competitive advantage. R&D can be expensive, and many companies struggle to find the right balance between spending too much and spending too little.
Most of the time, the company records R&D as expenses in the current year. However, it can be classified as assets when the company can prove that the research will provide benefits in the future. We have to look at criteria to recognize assets which include:
- Future economic benefit
- Cost measure reliable
Research and Development Journal Entry
When the future economic benefit is not certain, the company is not sure to use the knowledge from R&D to produce something new. So the R&D must be recorded as an expense when it incurs. The R&D expense will be considered as the operating expense on the income statement.
The journal entry is debiting research & development expense and credit accounts payable or cash.
| Account | Debit | Credit |
|---|---|---|
| R&D Expense | ### | |
| Accounts Payable/Cash | ### |
The transaction will increase expense on income statement and create liability on balance sheet or reduce cash balance.
If the company has enough evidence and commitment to complete the project, the cost of R&D can be capitalized as part of assets. It complies with the assets capitalization rule which the cost is measured reliably and it expects to bring future economic benefit to the company.
The journal entry is debiting assets and credit accounts payable or cash.
| Account | Debit | Credit |
|---|---|---|
| Capitalized Assets | ### | |
| Accounts Payable/Cash | ### |
The transaction will include the cost of R&D into the assets which the company is developing.
Research and Development Journal Entry Example
ABC is a company that develops computer software for customers. During the year, the company has formed a team to develop two software for their internal use.
The first project is to spend $ 5 million, however, it is not working as a plan so the company decided to abandon the project.
The second project is 2 million, and it reach the final stage and expects to be put into use next year.
Please record these two R&D projects.
The first R&D project is considered as an expense when the company has no willingness to complete it. There is no future economic benefit for the company. The journal entry is debiting R&D expense and credit cash.
| Account | Debit | Credit |
|---|---|---|
| R&D Expense | 5,000,000 | |
| Cash | 5,000,000 |
The R&D will go straight to the expense on income statement.
The second project is finalized, so it will bring the future economic to the company. It must be capitalized as intangible assets (Software). The journal entry is debiting intangible assets and credit cash.
| Account | Debit | Credit |
|---|---|---|
| Intangible Assets | 2,000,000 | |
| Cash | 2,000,000 |
The transaction will capitalize R&D as part of the software on balance sheet. It will be amortized based on the useful life of the software.
Research and development include:
- New product development: This is the process of creating a new product or service that has not been offered before.
- Product enhancement: This is the improvement of an existing product or service.
- Process innovation: This involves developing a new way to produce a product or deliver a service.
- Marketing innovation: This occurs when a company comes up with a new way to market its products or services.
- Business model innovation: This happens when a company comes up with a new way to make money from its products or services.