Capitalize in accounting definition
/What is Capitalize in Accounting?
An item is capitalized when it is recorded as an asset, rather than an expense. This means that the expenditure will appear in the balance sheet, rather than the income statement. When an item is capitalized, it is gradually charged to expense via depreciation or amortization, and so is gradually and systematically charged to expense through the income statement. You would normally capitalize an expenditure when it meets both of the criteria noted below.
Asset Exceeds Capitalization Limit
Companies set a capitalization limit, below which expenditures are deemed too immaterial to capitalize, as well as to maintain in the accounting records for a long period of time. A common capitalization limit is $1,000. A larger company might set a higher capitalization limit, on the grounds that charging smaller items directly to expense will have no material impact on its financial statements. The materiality principle applies to the capitalization concept.
Asset Has a Useful Life of at Least One Year
If an expenditure is expected to help the company generate revenues for a long period of time, then you should record it as an asset and then depreciate it over its useful life, which agrees with the matching principle.
Alternatives to Capitalization
When an asset has a useful life of just a few months, it may be more efficient to simply record it as a prepaid expense (a short-term asset), and then charge it to expense at a steady pace over its life. Or, if the business only issues quarterly financial statements, it might make sense to charge it directly to expense, on the assumption that it will be consumed over the three-month reporting period.
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Examples of Capitalization
Here are several examples to illustrate the concept:
A company pays $500 for a notebook computer. The computer has a useful life of three years, but it does not meet the company's $1,000 capitalization limit, so the controller charges it to expense in the current period.
A company pays $2,000 for maintenance on a machine. The payment exceeds the company's capitalization limit, but it has no useful life, so the controller charges it to expense in the current period.
A company pays $3,000 for a router. The router has a useful life of four years and surpasses the corporate capitalization limit of $1,000, so the controller records it as a fixed asset and begins depreciating it over its useful life.