Capitalize

Definition

Capitalize means to record an expense as an asset on the balance sheet rather than charging it immediately to the income statement. This typically applies to expenditures that provide future economic benefits beyond the current accounting period.

5 Must Know Facts For Your Next Test

1. Capitalizing an expense spreads its cost over multiple periods, aligning with the matching principle in accounting.
2. Major purchases like equipment, buildings, and vehicles are common examples of capitalized items.
3. Capitalization affects both the balance sheet (increasing assets) and income statement (reducing expenses in the short term).
4. Companies must follow specific guidelines under GAAP or IFRS to determine whether an expenditure should be capitalized.
5. Improper capitalization can lead to financial misstatements and potential regulatory scrutiny.

Review Questions

• What is the main difference between capitalizing an expense and expensing it?
• Can you name three types of expenditures that are typically capitalized?
• Why is it important for companies to follow GAAP or IFRS guidelines when deciding whether to capitalize an item?

Related terms

Accrual Accounting: A method where revenue and expenses are recorded when they are earned or incurred, not necessarily when cash changes hands.

Expense Recognition Principle: The principle that dictates how and when expenses are recognized in the financial statements.

Depreciation: The process of allocating the cost of a tangible asset over its useful life.