Accounting



What is capitalized interest?

Capitalized interest is the interest added to the cost of a self-constructed, long-term asset. It involves the interest on debt used to finance the asset’s construction.

The details of capitalized interest are explained in the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards No. 34, Capitalization of Interest Cost. You can find this accounting pronouncement at www.FASB.org/st.

In short, there must be debt involved (cash and common stock are not considered). The interest specified by the pronouncement is added to the cost of the project, instead of being expensed on the current period’s income statement. This capitalized interest will be part of the asset’s cost reported on the balance sheet, and will be part of the asset’s depreciation expense that will be reported in future income statements.

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About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

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Comments

20 Responses to “What is capitalized interest?”

  1. Ojei on March 16th, 2009 10:33 am

    i’m happy to join you people

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  2. Ojei on March 16th, 2009 10:36 am

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  3. sameer on April 15th, 2009 5:04 am

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  4. Grapes on April 28th, 2009 8:06 am

    I would like to know aout the treatment of capitalised interest in the accounts. My dilema is that the interst accrued in the prior year is accrued but not paid and instead capitalised. Should it still be shown in the P & L? The capitalised interest is also not a cas item as there’s no fresh cash coming into the business as such capitalisation of such interest should not increase the cash!!

  5. CPA_wannabe on April 30th, 2009 1:00 pm

    No, the capitalized interest should not be shown in the p&l since it was capitalized. depending on how the initial capitalization was recorded. For example if the initial interest capitalized was recorded as a debit to and asset and a credit to interest payable. In the following period, when the payment is made, you credit cash and debit interest payable. The reduction in interest payable will be reflected in your balance sheet.

    Hope this helps

  6. CPA_wannabe on April 30th, 2009 1:03 pm

    the only part of your capitalized interest that will be reflected in your income statement, is the depreciation of your asset.

  7. Ferewa-Kamara on May 5th, 2009 10:34 am

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  8. richard on May 17th, 2009 10:30 am

    wat does the term capitalisation mean

  9. Andrey on May 21st, 2009 1:23 am

    Hello all) will appreciate to receive your advice:
    1) As soon as the interests are capitalized, is there any int. practice for their repayment. i mean, repayment of the capitalized interests go the same way as a principal amount, other conditions are specified, or at the earliest possible?
    2) Is there? any tenor specified, after which default interest are capitalized?
    Thanks alot

  10. jay on August 31st, 2009 4:34 pm

    If the principle amount of the loan is paid prior to the maximum payment period, does the capitalized interest reduce in size? This is not clear to me by the given definition. If I pay off the loan x days over the total loan time frame, where the total time frame is ~4000 days, does the capitalized interest lower due? Or, is the capitalized interest more of a fee or charge?

  11. boy on September 6th, 2009 9:38 pm

    i’m glad to join u people

  12. hullaccountant2009 on November 24th, 2009 12:09 am

    i’m happy to join you people

    thanks

  13. VanillaH on November 24th, 2009 6:35 am

    How about the non-interest bearing note?
    Which interest rate should we use in the capitalization?
    For example, the economic interest rate or the discount rate that finding out the discount on the N/P shown on the balance sheet?

  14. pelenato Ioane on December 4th, 2009 4:42 pm

    Its great to see all different views which is a very helpful.

    Thx

  15. Olawealth on December 30th, 2009 3:04 am

    I want 2 join ur team

  16. LBL on January 29th, 2010 4:59 pm

    My mortgage was modified and the servicing co. capitalized $51k of interest and added it to my principal balance. They told me it will not show up as interest paid - i.e. no deduction for me. The IRS suggested this may not be the case. Any thoughts?
    Tx

  17. pat on February 10th, 2010 5:16 am

    it nice been 2 this site because it help me alot,to understand more about account.

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  18. shower cubicles on March 23rd, 2010 1:49 am

    Certainly got us thinking here are work, expect a few replies later.

  19. chinni on April 7th, 2010 1:48 am

    i would like to know how we can treat the capilized interest in balance sheet

  20. scott on May 3rd, 2010 9:03 am

    When you capitalize interest receivable, you change the term of the loan which the unpaid I/R becomes principal. My question is, when the I/R is due (accural), debit I/R and credit revenue, but when it is capitalized, debit L/R and credit I/R, but if it was never collected, what happens to revenue? does it get offsetting to another account or leave it as it was recorded orginally but close it to Operating expenses at year end?

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