Capitalize

Capitalize refers to an accounting method that allows companies to spread out the cost of new assets by deducting them as expenses over the long term (more than one year) without negatively impacting their revenues.

This is beneficial to new companies who need to acquire a lot of assets upfront but want to deduct the overall cost of those assets over time and spread out the cost since you will presumably be using said asset for more than a year.

There are some watch-outs though. You can’t capitalize your regular operating expenses. Doing so makes it look like you’re a much more profitable than you actually are due to an artificial boost in cash flow. Usually companies who engage in deceptive practices like this are found out and it doesn’t work out well for them, so it’s not a smart idea to try it.

 

Usually, you match your revenues and your expenses to the period when they occurred based on the matching principle of accounting. It makes sense that you buy a ream of paper and use that ream within the same period, that’s an expense. But when it comes to larger company assets like a computer or a car, things get a little more complicated because you’re not going to use the computer or car for just one period. Ideally, the machine is going to aid you in making money for a long while. So instead of immediately writing off the whole cost of what you paid for the computer or the car when it was purchased as an expense, you can write off the cost for as long as you’re using it. Usually items that cost a certain amount are considered a capitalized asset, but it can vary from company to company depending on what you do.

 

EXAMPLE:

Provided I don’t wreck it, this new car will be a great capitalized asset for years to come.

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