Capitalized Cost

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DEFINITION of 'Capitalized Cost'

An expense that is added to the cost basis of a fixed asset on a company's balance sheet. Capitalized Costs are incurred when building or financing fixed assets. Capitalized Costs are not expensed in the period they were incurred, but recognized over a period of time via depreciation or amortization.

INVESTOPEDIA EXPLAINS 'Capitalized Cost'

Capitalizing costs is an attempt to follow the Matching Principle of accounting. The Matching Principle seeks to match expenses with revenues. In other words, match the cost of an item to the period in which it is used, as opposed to when the cost was incurred. As some assets have long lives and will be generating revenue during that useful life, their costs may be amortized over a long period.

An example of this would be costs associated with constructing a new factory. The costs associated with building the asset (including labor and financing costs) can be added to the carrying value of the fixed asset on the balance sheet. These capitalized costs will be recognized in future periods, when revenues generated from the factory output are recognized.

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