How to Book Capitalization and Amortization for Costs to Obtain a Contract Journal Entry

Revenue recognition under ASC 606 requires the capitalization of costs to complete a contract. This is most often but is not limited to sales commissions. The capitalized costs are amortized over the  expected customer life (the contract length plus reasonably anticipated renewals).

As an example, assume that a company has acquired a customer for which it expense the customer lifetime to be five years. Identifiable costs associated with the contract are only sales commissions of $3,000. Under the company's normal payroll processes, sales commissions are expensed monthly.

The first entry to capitalize the contract costs is:

Debit Capitalized Contract Costs (Asset): $3,000
Credit Commission Expense: $3,000

Each month, an amortization of the cost is recorded. In this example, the amortization will go back in to commission expense.

Debit Commission Expense: $50
Credit Capitalized Contract Costs: $50

Depending on your preferences, you may wish to use an Accumulated Amortization Contra-Asset account.

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