Capitalization of Software Development Costs

This question tests your understanding of how GAAP treats software development costs in different phases of development and why the accounting changes depending on the software’s intended use. In interviews, you are expected to know that not every development cost is capitalized, and that the key is identifying which activities meet the recognition criteria under the relevant rules, such as costs tied to internal use software versus software developed for sale.

Interviewers ask this because it checks whether you can connect accounting policy to business reality, distinguish between expense and capitalization, and explain the downstream impact on the income statement and balance sheet. It also tests whether you understand how capitalization affects future amortization and reported earnings over time.