Are you an accountant who is looking for a better way to track your business’s expenses and income? Have you been considering the differences between accounting for cloud services with a capital or revenue approach?
In this article, we’ll discuss the differences between capital and revenue accounting for cloud services, as well as the advantages and disadvantages of each.
Capital accounting is when you spread the cost of a purchase over multiple accounting periods to establish the cost of a long-term asset. In terms of cloud services, this means you would allocate the cost over its expected lifespan. The advantage of this approach is the cost can be spread over multiple accounting periods, thus reducing your expenses for the current cycle.
However, this method can also be tricky. You have to estimate the lifespan of the cloud service in question accurately and also predict what your business’s expenses will be in the future. In addition, any upgrades to the technology may be hard to quantify.
Revenue accounting is when the cost is charged to an expense account and is booked as an expense in the current accounting period. This means you’ll have a higher expense in the current cycle, but you won’t have to worry about estimating future expenses.
The downside of this approach is that it can lead to overspending if you’re not careful. You also may lose out in the long run since you don’t have the benefit of spreading out the cost of the service.
Comparing Physical and Off-Premise Servers
Before deciding between capital and revenue accounting, you'll want to consider whether the cloud service requires physical servers or virtual/cloud servers.
For physical servers, the cost of acquiring, operating, and maintaining these servers is typically going to be higher than with virtual/cloud servers. As a result, it would make sense to spread out the cost to a capital account in order to cover the cost more easily.
With virtual/cloud servers, however, the cost of operation is typically much lower. This makes it easier to allocate the cost as an expense since you don’t have to worry about long-term capital costs.
Overall, the choice between capital and revenue accounting largely relies on the type of cloud service you choose.