What does capitalize mean?

The word capitalize means to record the amount of an item in a balance sheet account as opposed to the income statement. (The accounts in the general ledger and in the chart of accounts consist of two types of accounts: balance sheet accounts and income statement accounts.)

To illustrate, let's assume that your company purchases a new computer printer for your office. Its cost is $700. If your company is a small company, it might capitalize the cost of the printer. That means the printer will be included in an equipment account and will be reported in the property, plant and equipment section of the balance sheet. Its cost will be depreciated over the printer's useful life.

A larger company might decide that $700 is an immaterial amount and will not capitalize the printer as an asset. Rather, the large company will expense the printer immediately. (This larger company might have a policy of not capitalizing any asset with a cost of less than $1,000 because of the materiality convention. This is allowed because no reader of the financial statement is going to be misled because the $700 will appear as an expense in the year the printer is purchased instead of $140 in that year and $140 in each of the subsequent four years.)

Another example of capitalize involves leased equipment. If your company leases a forklift truck, is the lease a rental agreement, or is the lease really a disguised purchase and financing arrangement? If it is the latter, then the forklift truck and the lease should be capitalized. The forklift truck should appear on the balance sheet as part of the company's equipment, and the amount of principal owed needs to be reported as a liability on the balance sheet.

Free Financial Statements Cheat Sheet

You are already subscribed. This offer is not available to existing subscribers.
Error: You have unsubscribed from this list.
Step 2: Please check your email.