Costs should be capitalized or recorded as assets when the costs have not expired and they have future economic value. For example, on November 25 a company pays $12,000 for property insurance covering the six months of December through May. The $12,000 is initially recorded as the current asset Prepaid Insurance. On November 30 the company will report this asset at $12,000 since the $12,000 has a future economic value. (It will save making future payments of cash for insurance coverage.) On December 31 the asset will be reported as $10,000—the unexpired cost.
It will also report Insurance Expense for the month of December as $2,000—the cost that has expired during December. On January 31 the asset will be reported at the unexpired cost of $8,000. January's insurance expense will be $2,000—the amount that has expired during January.
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