1 Answer | Add Yours
More accurately, any capitalized amount is not immediately (and completely) charged as an expense for the year in which it is incurred. The capitalized amount is rather charged over a number of years by using amortization or the principle of depreciation (for a depreciating asset).
Generally businesses use capitalization for any asset, subjected to a minimum value policy (say anything less than $1000 is not capitalized for some business). For example, a law firm buys office furniture for $5000 and wants to use it as an asset. Then the same can be capitalized and instead of showing this amount as an expense for that year, the amount can be divided into (say) 10 parts to be reported as an expense for the next 10 years (assuming a functional life of 10 years for the asset). In this way, the firm will only report $500 per year as an expense incurred towards this purchase. In fact, they can also use standard depreciation on this asset and report even less expense on a yearly basis.
We’ve answered 319,627 questions. We can answer yours, too.Ask a question