Which type of costs must be capitalized when developing computer software for internal use?

When developing computer software for internal use, the costs that must be capitalized are those incurred after the preliminary project stage. This captures the expenditures that directly contribute to the software's development and readiness for use.

Costs that occur after the preliminary project stage typically include things like costs for design, coding, installation, and testing. These phases involve tangible development work that creates the final asset, which is why they are capitalized on the balance sheet rather than being expensed immediately. This capitalization is in alignment with the accounting standards, which state that costs that enhance future economic benefits should be recognized as an asset.

In contrast, costs associated with training employees, post-implementation maintenance, and those incurred during the planning stage, do not contribute directly to the creation of the software itself and therefore should be expensed as incurred. Training costs are operational expenses, maintenance costs ensure the software continues to function properly after it has been implemented, and development activities in the planning stage do not involve developing the software product itself. Thus, the capitalization of costs is specifically justified for expenses incurred as the project moves beyond the preliminary project phase, solidifying the correct focus of capitalizing only relevant production costs.