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 Costs
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 Costs
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.