Capitalisation of R&D or advertising expenditure

Prudence also demands that expenditure on things like research and development or advertising for which future benefits cannot be clearly identified should not be 'capitalised' (treated as an asset and carried forward to be matched against revenues earned as a result of the current expenditure) but must be treated as current revenue expenditure. Only where future benefits can be clearly and unambiguously related to such expenditure (e.g., R & D is part of an MOD contract) can it be treated as an asset - providing future benefits.

More financial accounting conventions reviewed

Accounting entity

The company (or any accounting entity) is treated as separate from its owners. The company possesses and controls its own assets which are managed on behalf of the shareholders. The shareholders act as principals and the managers as agents in this agency relationship. The managers are accountable to the shareholders for the stewardship of the assets invested by the shareholders.