The capitalization limit is the amount of expenditure below which you record an item as an expense, rather than an asset. For example, if the capitalization limit is $5,000, then you should record all expenditures of $4,999 or less as expenses in the period when you recorded the expenditure.
If an asset meets both of the preceding criteria, then your next step is to decide what the proper account classification should be. Here are the most common classifications used:
- Buildings. This account may include the cost of acquiring a building, or the cost of constructing one (in which case it is transferred from the Construction in Progress account). If the purchase price of a building includes the cost of land, then apportion some of the cost to the Land account (which is not depreciated).
- Computer equipment. Can include a broad array of computer equipment, such as routers, servers, and backup power generators. It is useful to set the capitalization limit higher than the cost of desktop and laptop computers, so that you do not have to track these items as assets.
- Construction in progress. This account is a temporary one, and is intended to store the ongoing cost of constructing a building; once completed, you shift the balance in this account go the Buildings account, and then start depreciating it. Besides the materials and labor required for construction, you can also store in this account architecture fees, the cost of building permits, and so forth.
- Furniture and fixtures. This is one of the broadest categories of fixed assets, since it can include such diverse assets as warehouse storage racks, office cubicles, and desks.
- Intangible assets. This is a non-physical asset, examples of which are trademarks, customer lists, literary works, broadcast rights, and patented technology.
- Land. This is the only asset that is not depreciated, because it is considered to have an indeterminate useful life. Include in this category all expenditures to prepare the land for its intended purpose, such as demolishing an existing building, or grading the land.
- Land improvements. Include an expenditures that add functionality to a parcel of land, such as irrigation systems, fencing, and landscaping.
- Leasehold improvements. These are improvements to leased space that are made by the tenant, and typically include office space, air conditioning, telephone wiring, and related permanent fixtures.
- Office equipment. This account contains such equipment as copiers, printers, and video equipment. Some companies elect to merge this account into the Furniture and Fixtures account, especially if they have few office equipment items.
- Software. Includes larger types of departmental or company-wide software, such as enterprise resources planning software or accounting software. Many desktop software packages are not sufficiently expensive to exceed the corporate capitalization limit.
A capital lease is not usually identified as a separate asset, since a lease merely identifies a form of financing; it does not identify the type of asset. Consequently, you should record the asset side of a capital lease in one of the above classifications. The liability side of the capital lease should be identified as a capital lease.