Definition of Capitalize
In accounting, the word capitalize means to record an expenditure as an asset. The cost of this asset is then allocated to expense over its useful life. (If the expenditure’s useful life is less than a year or its future value cannot be quantified, the cost is recorded as an expense in the year of the expenditure.)
Examples of Capitalized Costs
When a company constructs a new building, the interest incurred to finance its construction is capitalized. This means that the interest during construction will be part of the cost of the building (a noncurrent or long-term asset). The total cost will then be depreciated over the building’s useful life. (On the other hand, interest to finance the company’s operations or to build equipment is not capitalized. This interest is reported immediately as interest expense on the income statement.)
If a company purchases an old machine in need of complete updating, the cost of the new components and the labor to rebuild the machine will be capitalized. This means that the total cost of the machine will be allocated to Depreciation Expense over the years of the machine’s useful life. (On the other hand, the expenditures to get a machine back to its previous working condition are not capitalized. These expenditures should be charged immediately to Repairs and Maintenance Expense.)
