I got my accounting degree, passed the CPA exam, and have worked in accounting for 5.5 years. I’ve always thought that to capitalize means to recognize an item on the balance sheet, be it asset, liability, or equity, long term or short term, tangible or intangible, skinny or fat, whatever.
But someone at work said I am wrong. That person said you only capitalize fixed assets.
I was briefly a cost accountant, and I remember there was an entry to capitalize manufacturing variances to the inventory account. Inventory is not fixed asset for sure.
What do you think? What does capitalize really mean in accounting?
Capitalizing essentially means any asset that you can depreciate. Essentially, instead of expensing the full amount on purchase you instead depreciate the asset over it’s useful life. Basically matching the expense to the period it is incurred, not all at once.
@mgoloubenko is half correct…he’s correct in the sense that you do match expenses with revenues generated in future periods. However, he’s incorrect in saying that you only capitalize to depreciable assets. For example: “freight in” is capitalized to inventory and inventory is not a depreciable asset. When you think “capitalize” you are taking what would normally be an expense in that period and essentially deferring it by adding it to the cost of a pre-existing asset (e.g. interest on borrowings for construction assets, costs to get equipment in place for use, freight in on inventory, etc.). Hopefully that helps.
Capital Asset = Deferred Cost. Capitalizing is recording an expense as an asset.
Capitalize = writing off over a longer period of time (over multiple years) versus expenses which are written off in the same year.
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