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).

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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:

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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.

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

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