Capitalized software

Capitalized software is the cost of building software, for a company's own use or for sale, that is recorded as an asset on the balance sheet rather than as an expense right away. The cost is then spread over the software's useful life through amortization.

Accounting rules allow this once a project moves past the early planning stage and is likely to be completed. Salaries of developers working on the software are a common example of costs that get capitalized.

Capitalizing costs raises reported earnings today, since the expense is spread over later years. The cash still leaves when the developers are paid, but it shows up as investing cash flow rather than operating cash flow. When comparing software companies, check how much each capitalizes, because a company that capitalizes heavily can look more profitable than a peer that expenses everything.