Accounting for Website Development Costs
The cost of website development can vary greatly depending on the size and complexity of the project. They include the cost spend to build custom design, coding, testing, and launch.
Many factors influence how much you will pay to develop a website, such as the functionalities required and the experience of the development team.
Building an e-commerce website with multiple payment options, we can expect to pay more than for a simple informational website. Some websites may even require custom graphics or other creative elements that could further drive up the costs. Of course, the overall costs depend heavily on individual budgets and goals, so it’s essential to consult with a professional developer and work out a realistic plan before beginning any project.
Accountants must use their knowledge and expertise to determine whether website development costs are better classified as an expense or intangible asset. Whether it’s a full-fledged business website or a blog, investments in online presence can play an important role in a company’s success.
Accounting guidelines are constantly being revised to keep pace with technological advances, so accountants working on web projects need to make sure they understand the regulation regarding capital assets versus operating expenses.
Moreover, as budgeting and long-term planning involve making predictions about future returns generated by web design efforts, accountants should be engaged in the process early on for providing their insights relating to the cost-effectiveness of current website plans. A competent accountant will help companies make confident decisions about website development costs that suit their needs and goals.
Journal Entry for Website Development Cost
The development cost will be classified as the expense or intangible assets depending on the nature of the transactions. Please refer to the criteria below:
Classified as Expense
When it comes to running a successful business, website development costs can often be overlooked as an expense. Investing in the development of your website pays off in more ways than one, as it serves as a platform to introduce potential customers to your products or services, not to mention generating traffic to help create brand awareness and promote sales growth. With proper budgeting and the right resources in place, developing a respected website doesn’t have to be quite as costly as expected.
The website development cost will be classified as the expense if the cost incurs in the following stage:
- Planning state
- Content Development Stage
- Operating Stage
We will explain each stage in the following sections:
1. Planning Stage
The first stage in any project is planning, it is also the same for website development. This involves developing a plan for the website and determining what specific goals need to be achieved.
The company needs to define the site’s functions that need to be included, any resources or materials needed, how long it will take, an estimated cost, and so on. It includes both software and hardware that require to operate.
At this stage, you can also decide who will be performing which tasks and select vendors who may be able to provide the tools needed for project completion. It may be developed in-house or by hiring the vendor, we need to find the most effective way to execute the site.
Planning also involves assessing the risks associated with each task of the project and considering alternatives that could reduce these risks should they arise. It’s important to note here that failure to develop an effective plan can lead to delays in task completion, increase costs or produce unsuccessful results even though all intended objectives have been met. It is therefore essential to fully assess each step before proceeding so that potential issues are identified beforehand and managed accordingly.
All the costs that happen in this stage will be recorded as the operating expense as we are not sure about the outcome of our website. There is no expected future economic inflow into the company yet.
2. Content Development Stage
The content development stage is an essential part of any successful business website, yet it can be quite costly. Companies must ensure that expenses associated with developing and managing content specifically to help market their products and services are allocated in the right way and tracked closely. Content can come in various forms such as videos, articles, podcasts, newsletters, and more, and creating quality material takes planning, money, and effort.
But done properly, it will increase in brand awareness through a boost in search engine results and social media interactions which boost customer engagement. A company should always remember that developing engaging content does not just improve the visibility of its own products or services but can also enhance its brand identity in a competitive marketplace.
The costs that company spends to put content on the website will be classified as the expense. It is an ongoing expense that needs to incur on a regular basic.
3. Operating Stage
Upon completion of the website development, the operating stage begins. During this stage, expenditure is incurred in its maintenance and upkeep, such as hosting services, secure certifications, and possibly further development for improvements.
By following IAS 38.18, companies can approach such expenses responsibly by recognizing them as an expense when it is incurred or amortizing the cost over helpful periods for financial reporting. However, whatever method is employed should be transparent so that stakeholders, auditors, and governing entities can accurately assess a business’s performance and justify any expenditure related to websites.
If the development cost meets all of these criteria above, we need to record it as the expense for the accounting period. The journal entry is debiting expenses and credit cash or accounts payable.
| Account | Debit | Credit |
|---|---|---|
| Website Development Cost | 000 | |
| Cash | 000 |
Classified as Intangible Assets
Website application and infrastructure development stage
Now that a website concept has been established, it is time for the application and infrastructure development stage to begin. During this phase, activities are conducted in order to acquire or develop both hardware and software related to the website.
This includes deciding which specific type of hardware, operating system, and software are needed to properly execute the website.
Furthermore, system experts need to evaluate the “back-end” components of a website’s infrastructure in order to make sure everything works together seamlessly and without interruption. This is an extensive process that requires skill and precision for successful completion.
These are the costs that must be capitalized as intangible assets on the balance sheet.
Development Stage
In the development stage, there are several costs that must be capitalized as assets. They include the Software and the overall design of the site.
Capitalizing graphic development fees at the start of a project can prevent time-wasting redesigns down the line and help keep the budget on track. Ultimately, capitalizing on initial graphical costs is essential to creating an impactful website that reflects your brand’s vision.
Content Development
To ensure a website and database contain the right information, it is essential to look into software that can integrate the two systems together. Software used to perform this function should be applied and accounted for on an ongoing basis in accordance with internal-use software guidance.
This will provide ongoing assurance that appropriate data is being stored securely and efficiently, allowing swift access to various web pages and reliable connections between databases. Additionally, documentation should be implemented to confirm changes are made as needed in order to properly maintain both the website and database.
Operating Stage
The operating stage of your business is when you are most likely to incur extra costs. Whether it is providing additional functions or features, these costs must be closely evaluated to reconcile between expensing and capitalizing.
The company will require to capitalize on additional costs when there are extending the website’s functionality and any significant upgrade.
If the website development cost meets these criteria, it will record as intangible assets on the balance sheet. The journal entry is debiting intangible assets and credit cash or accounts payable.
| Account | Debit | Credit |
|---|---|---|
| Intangible Assets – Website Development Cost | 000 | |
| Cash | 000 |