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November 17, 2006

What does capitalize mean?

The word capitalize means to record the amount of an item in a balance sheet account as opposed to the income statement. (The accounts in the general ledger and in the chart of accounts consist of two types of accounts: balance sheet accounts and income statement accounts.)

To illustrate, let’s assume that your company purchases a new computer printer for your office. Its cost is $700. If your company is a small company, it might capitalize the cost of the printer. That means the printer will be included in an equipment account and will be reported in the property, plant and equipment section of the balance sheet. Its cost will be depreciated over the printer’s useful life. A larger company might decide that $700 is an immaterial amount and will not capitalize the printer as an asset. Rather, the large company will expense the printer immediately. (This larger company might have a policy of not capitalizing any asset with a cost of less than $1,000 because of the materiality convention. This is allowed because no reader of the financial statement is going to be misled because the $700 will appear in the year the printer is purchased instead of $140 in that year and $140 in each of the subsequent four years.)

Another example of capitalize involves leased equipment. If your company leases a forklift truck, is the lease a rental agreement, or is the lease really a disguised purchase and financing arrangement? If it is the latter, then the forklift truck and the lease should be capitalized. The forklift truck should appear on the balance sheet as part of the company’s equipment, and the amount of principal owed needs to be reported as a liability on the balance sheet.

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Comments

10 Responses to “What does capitalize mean?”

  1. veronica on December 28th, 2007 6:16 pm

    If I am being asked to capitalize a new gate purchased for a park which was expensed in October, do I now record this as an asset on the Balance Sheet?

    Thank You!

  2. Melik on January 4th, 2008 9:56 am

    The gate should be capitalize over a certain amount of years usually an idea of how long it will be of use should be an amount of years. Maybe somthing like 20-25 years. This should be a fixed asset on ur balance sheet. Now I believe for it to be an asset of value if ur park would to go out of business would you be able to sell it to some one else. But that I might be wrong about. If someone is is asking you to capitalize the Gate then I would put it under ur fixed asset schedule. Good luck hope I was of help

  3. Nikki on May 19th, 2008 3:58 pm

    We recently obtained new computer equipment on a finance lease. I was told that this type of lease requires us to capitalise the assets, capitalise the pre-paid interest on the balance sheet and recognise the full liability under the finance lease. What exactly do I need to do initially?

    Thank you-

  4. Nadeer Chandroth on October 12th, 2008 10:30 pm

    What is operating lease and finance lease. Can you illustrate with example.

  5. N SRINIVASAN on January 21st, 2009 4:33 am

    Our Company has acquired a Sugar Mfg unit on Lease for 30 years. Now that we wanted to expand that unit and are going to incur CAPEX for expansion. Pl clarify whether the new CAPEX has to be capitalized or expensed. Also pl us know in former case, depreciation has to be provided, even if it is a leased unit.
    Thanks.

  6. Bert on April 11th, 2009 2:46 pm

    I am quickly going over some accounting principals, and from what I understand, I can purchases the set for $30.00 or how does it work? I just want to make sure what I get if I decide to purchase the whole program. is the a number I can call. Thank you.

  7. brick on May 21st, 2009 8:23 pm

    if iam asked to capitalize inentory for a trucking company where will i get the numbers to get the capitalization amount?

  8. matt on June 29th, 2009 4:11 pm

    Where can I get information on determining what costs can be capitalized when implementing/upgrading an entire new phone system for our company? Is there a FASB pronouncement or something similiar? Would it be in GAAP book. I just need a short write up to view.

  9. JoeM on August 19th, 2009 2:49 pm

    Can an extended warranty on a computer be capitalized? i.e. a 3 year warranty purchased seperately has been purchased for our server after the mftg warranty expire.

  10. Mai on October 16th, 2009 12:27 am

    I have questions:
    Should Research and Development be capitalized and depreciated, or expensed as incurred?

    How depletion expense is recorded for a natural resource.
    MACRS depreciation is an income tax method of depreciation. Is it similar to straight line or DDB depreciation?

    Thank you

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