What is R and D?
R and D stands for Research and Development. R and D expenditure relates to any costs incurred in carrying out research and development work on new or improved products, services or processes.
A business will spend money on R and D with the intention of developing a product so that income can be generated in future accounting periods.
Research is original investigation carried out to gain new scientific or technical knowledge, for example a pharmaceutical business might undergo tests to develop new medicines. At this stage there is no reasonable expectation of future income or benefit.
Research costs are charged to the income statement in the year they are incurred, as research does not directly lead to future income. Capitalizing research costs would not comply with the accruals concept of accounting.
Development is the application of research with a view to getting ready for commercial production, for example pre-production testing of a new machine model would be regarded as development. In such circumstances there might be a reasonable expectation of future income and benefit
Development costs are also normally written off as expenses in the year in which they are incurred. However, if there is a reasonable expectation of future income, and the costs satisfy criteria set out in Accounting Standards, they are allowed to be capitalized on the balance sheet of the business.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.