Capitalize

Loading the player...

What is to 'Capitalize'

Capitalize is an accounting method used to delay the recognition of expenses by recording the expense as a long-term asset. In general, capitalizing expenses is beneficial as companies acquiring new assets with a long-term lifespan can spread out the cost. Companies are allowed to take expenses they incur in the current period and deduct them over the long-term life of the asset.

BREAKING DOWN 'Capitalize'

If a company capitalizes regular operating expenses, it is doing so inappropriately, most likely to artificially boost its operating cash flow and look like a more profitable company. These fraudulent practices are generally exposed in the long run. It is important not to confuse capitalize with market capitalization.

One of the most important principles in accounting is the matching principle. It says that accountants must match revenues and expenses to the period in which they occurred. This is a simple task when expensing office supplies as they are typically used within one year, but what about a computer or a car? These are assets that can bring value to the business for multiple years. Instead of expensing the entire cost of the computer or car when purchased, accounting rules allow companies to write off the cost of the asset over its useful life. In other words, the asset is written off as it is used. Most companies have an asset threshold. That is, assets valued over a certain amount are automatically treated as a capitalized asset.

Capitalization Example

An asset is a storage of value. To capitalize an expense and record it as an asset means the company plans on using the item purchased for an extended period of time in the future. An expense is capitalized when it is recorded as an asset, due to its future value, on the balance sheet rather than an expense on the income statement. Companies like to capitalize assets because it reduces expenses and increases net income even though cash flow goes down. As an example, it is not uncommon for companies to expense office supplies and capitalize computers and cars.

Depreciation

The process of writing off an asset, or capitalizing an asset over the life of the asset, is referred to as depreciation, or amortization for intangible assets. Depreciation deducts a certain value from the asset every year until the full value of the asset is written off of the balance sheet. The annual depreciation expense comes out of net income and is determined based on the useful life of the asset, the total cost of the asset and the salvage value of the asset.

RELATED TERMS
  1. Business Asset

    A piece of property or equipment purchased exclusively or primarily ...
  2. Long-Term Assets

    1. The value of a company's property, equipment and other capital ...
  3. Declining Balance Method

    A common depreciation-calculation system that involves applying ...
  4. Replacement Cost

    The cost to replace the assets of a company or a property of ...
  5. Accumulated Depreciation

    The cumulative depreciation of an asset up to a single point ...
  6. Capitalized Interest

    An account created in the income statement section of a business' ...
Related Articles
  1. Investing

    Understanding Capital Assets

    A capital asset is one that a company plans on owning for more than one year, and uses in the production of revenue.
  2. Investing

    Explaining Capitalized Cost

    A capitalized cost is an expense associated with a fixed asset that is added to the basis of that asset and expensed over its depreciable life.
  3. Managing Wealth

    What's an Asset?

    An asset is a resource with economic value.
  4. Personal Finance

    Assessing Bank Assets: Are Your Savings Safe?

    Learn how to determine if your assets are safe or if your bank has spread itself too thin.
  5. Investing

    Capital Expenditure Versus Revenue Expenditure

    Capital expenditures and revenue expenses have significant differences. Here's the difference between the two.
  6. Investing

    Calculating Return on Net Assets

    Return on net assets measures a company’s financial performance.
  7. Investing

    Understanding Capitalized Interest

    Capitalized interest is associated with debt used to make or construct a depreciable asset.
  8. Investing

    What's a Fixed Asset?

    Fixed assets are tangible property that a business uses in the process of producing income. To qualify as a fixed asset, the item cannot be consumed or sold in less than a year. Fixed assets ...
  9. Markets

    How To Evaluate A Company's Balance Sheet

    Asset performance shows how what a company owes and owns affects its investment quality.
  10. Investing

    Understanding Carrying Value

    Carrying value is the value of an asset as listed on a company’s balance sheet. Carrying value is the same as book value.
RELATED FAQS
  1. What is the difference between capital and operating expenses?

    Learn about the types of expenses that a company incurs. Understand the difference between capital and operating expenses, ... Read Answer >>
  2. Why do companies often treat events such as the purchase of an asset or construction ...

    Understand the capitalized costs of fixed assets and learn how they are reflected on a company's balance sheet and income ... Read Answer >>
  3. Are capital assets normally immediately expensed or are they amortized/depreciated ...

    Understand the distinction between capital assets and business expenses, and learn whether capital assets are usually expensed ... Read Answer >>
  4. What are typical examples of capitalized costs within a company?

    Learn examples of capitalized costs such as expenses incurred to put fixed assets to use as well as software development ... Read Answer >>
  5. Can working capital be depreciated?

    Learn the difference between expensing and depreciation for current and long-term assets, and how working capital can be ... Read Answer >>
  6. What is the difference between an operating expense and a capital expense?

    Learn the differences between an operating expense and a capital expense, and see how the two types of expenses are treated ... Read Answer >>
Hot Definitions
  1. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  2. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  3. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  4. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  5. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
  6. Real Rate Of Return

    The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other ...
Trading Center