Debt Dictionary


Investment Dictionary -> capitalization

The term capitalization is used when the acquisition costs are recorded as assets rather than treated as expenses. The accounting standards differentiate between two kinds of expenses. The first type of expense is incurred on assets that will be consumed immediately in the normal work of the company. The second type represents expense on assets that will be operating for many years to the benefit of the company. An asset which provides service for many years may be capitalized. It will be referred to as capital expenditure and added to the asset account. This increases the value of the asset as defined for tax purposes.

The term capital expenditure covers several types of assets. Amounts spent on the acquisition of fixed assets fall into the category of capital expenditures. Similarly, the money spent to add value to existing fixed assets qualifies as capital expenditures. The requirement is that the assets have useful life that extends beyond one calendar year. Repair work on problems that existed prior to the acquisition of the assets fall into this category. Other covered categories are: the start-up costs of a new business activity, the renovation and adaptation of assets to be used by the company, and the legal costs to establish and maintain property rights over a real estate. Expenses which are incurred to maintain the current condition of an asset shall be deduced during the same year.

Capital expenditure is used most extensively in the oil, telecommunications, and utility industries. In general, capitalization is beneficial for companies because it allows for the delayed recognition of expenses. Companies that acquire long-term assets can spread out the costs over certain periods of time. Usually, the goal is to maintain or enlarge the scope of activities. When the cost of equipment is capitalized, the particular item is recorded as a tangible asset on the balance sheet. Shipping charges are also capitalized and included as assets. Then, the asset is subject to depreciation for many years. If the item in question is an intangible asset, it will be amortized. Costs which are not capitalized will appear as the costs of the items.

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