Technical Debt or Technical Bankruptcy? A Financial Look at Code Maintenance
Early in my career, one of the first items I heard others talking about was technical debt. This was a brand new concept to me because, for the most part, my college years consisted of writing new code for simple projects. There wasn’t a lot of legacy code that we dealt with.
After being in the industry for more than 20 years, I have seen my fair share of technical debt. But what is technical debt and why is it important? This topic has been discussed ad nauseum, but for the sake of this discussion, I am going to use the following definition:
“Anything that must be done to a code base so that a feature can be added, removed, a bug fixed or a security risk can be mitigated.”
Ultimately this boils down to all the support that you must do in order to keep a code base healthy.
This isn’t a new conversation, but here’s a less common way to frame it: through a general ledger. What happens when you treat software as a capital asset, just like any other investment?
Let’s take a look.
Case 1: Software That Drives Value
Say you’ve invested $150K to build a custom software solution. It costs $50K a year to support and generates $1M in annual revenue. That’s a clear asset.
Here’s how that might look in a general ledger:
| Reason for Entry | Date | Account Name | Debit ($) | Credit ($) | Description |
| Year 1 Capitalization of Software | 2025-01-01 | Intangible Assets – Software | 150,000 | Capitalized software dev costs | |
| Year 1 Capitalization of Software | 2025-01-01 | Cash/Bank | 150,000 | Payment for development work | |
| Annual Revenue from Software | 2025-12-31 | Accounts Receivable/Cash | 1,000,000 | Revenue from software usage | |
| Annual Revenue from Software | 2025-12-31 | Software Revenue | 1,000,000 | Recognized annual revenue | |
| Annual Amortization of Software Asset | 2025-12-31 | Amortization Expense | 50,000 | Annual software amortization | |
| Annual Amortization of Software Asset | 2025-12-31 | Accumulated Amortization | 50,000 | Accumulated software amortization | |
| Annual Support Expense | 2025-12-31 | Software Maintenance Expense | 50,000 | Annual software support cost | |
| Annual Support Expense | 2025-12-31 | Cash Accounts/Payable | 50,000 | Payment for maintenance costs |
Summary of General Ledger Accounts
At the end of Year 1, the GL would summarize like this:
BALANCE SHEET ITEMS:
| Intangible Assets (Software) | Amount ($) |
| Software (initial capitalized) | 150,000 |
| Less: Accumulated Amortization | (50,000) |
| Net Software Asset (End Year 1) | 100,000 |
PROFIT & LOSS (P&L) ITEMS (Year 1):
| Revenue and Expenses | Amount ($) |
| Software Revenue | 1,000,000 |
| Less: Amortization Expense | (50,000) |
| Less: Maintenance Expense | (50,000) |
| Net Software Profit (Year 1) | 900,000 |
End of Year 1:
- Net Software Asset: $100,000
- Net Profit: $900,000
Not bad. This software clearly earns its place on the balance sheet.
Case 2: Software That’s Draining Resources
Now imagine an older system that is hard to maintain and is costing your company more money to keep up. It was built three years ago for $500K and costs $250K a year to maintain. It only brings in $150K per year in value. No new features, no strategic advantage. Just overhead.
General Ledger Example:
| Reason for Entry | Date | Account | Debit ($) | Credit ($) | Description |
| Initial Capitalization (Occurred 3 years ago) | 2023-01-01 | Intangible Assets – Software | 500,000 | Initial development capitalization | |
| Initial Capitalization (Occurred 3 years ago) | 2023-01-01 | Cash/Bank | 500,000 | Paid software development costs | |
| Current Year Revenue – Year 3 | 2025-12-31 | Cash or Accounts Receivable | 150,000 | Revenue from software usage | |
| Current Year Revenue – Year 3 | 2025-12-31 | Software Revenue | 150,000 | Recognition of annual software income | |
| Current Year Amortization – Year 3 | 2025-12-31 | Amortization Expense | 100,0000 | Annual amortization (year 3) | |
| Current Year Amortization – Year 3 | 2025-12-31 | Accumulated Amortization | 100,000 | Accumulated amortization (year 3) | |
| Current Year Maintenance Expense – Year 3 | 2015-12-31 | Software Maintenance Expense | 250,000 | Annual maintenance/support costs | |
| Current Year Maintenance Expense – Year 3 | 2015-12-31 | Cash or Accounts Payable | 250,000 | Payment for maintenance |
Summary of Accounts at End of Year 3:
Balance Sheet:
| Intangible Assets (Software) | Amount ($) |
| Initial Capitalized Cost | 500,000 |
| Less: Accumulated Amortization (3 years) | (300,000) |
| Net Software Asset (end of Year 3) | 200,000 |
- Total Revenue (3 years):
$150,000 × 3 = $450,000 - Total Amortization (3 years):
$100,000 × 3 = $300,000 - Total Maintenance (3 years):
$250,000 × 3 = $750,000 - Net Cumulative Loss (3 years):
$450,000 – $300,000 – $750,000 = ($600,000)
After 3 years you have lost $600,000 on this software and have a $200,000 asset on paper, but functionally, it’s a drag on your business. It is time to decide what to do with this software.
From Debt to Bankruptcy
So how do you know when technical debt crosses the line into technical bankruptcy?
Ask yourself:
- Is the software costing more to maintain than it delivers in value?
- Are users actively relying on it—or is it mostly sitting idle?
- Is it delivering a competitive advantage, or just sustaining the status quo?
Three Paths Forward
Is there anything you can do at this point?
- Delete it: if the software is of little to no value and you don’t see its functionality as a need, just delete it. This is the easiest thing to do!
- Purchase a replacement: if there is an off the shelf solution that will meet your company’s needs. Furthermore if this software is not part of your core business you might look towards purchasing a solution. For example, if you are an insurance company, you probably can purchase an ITSM solution that meets your needs.
- Rebuild it, smarter: If the solution is core to your business and provides a competitive advantage this might be one way to wipe out the debt. With AI assisted engineering tools you can develop software way quicker and get faster feedback. The cost savings can be significant 20%-50% less when compared to a few years ago.
How to Avoid Bankruptcy in the First Place
- Budget for technical debt mitigation: Provide estimates that include mitigating technical debt. This is part of the engineering process and should be treated as such.
- Stay current: Frequently deploy library updates to production and make time for upgrades.
- Practice evolutionary architecture: Only build what you need to when you need to, don’t overly complicate your architecture.
- Adopt TDD and refactoring habits: This will allow you to refactor code safely and frequently.
Final Thoughts
You can’t avoid technical debt, but you can avoid going bankrupt because of it. The key is seeing your software for what it really is: a financial asset with a lifecycle. If it’s no longer earning its keep, you need to decide whether to refactor, rebuild, replace, or retire.
Accounting tells the story. You just have to look.
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Just a quick accounting note 🤓 Software can be classified as an asset on your balance sheet if it’s either purchased or custom-built in-house—and if it has a useful life of more than one year. Subscription-based software, on the other hand, doesn’t qualify.