What is the difference between the terms capitalize and depreciate?

Capitalize refers to adding an amount to the balance sheet. For example, certain interest from loans to self-construct a building will be added to the cost of the building. The building's cost including the capitalized interest will be recorded as an asset on the balance sheet.

Depreciate refers to reducing an amount reported on the balance sheet. Depreciation is defined as systematically allocating the cost of a plant asset from the balance sheet and reporting it as depreciation expense on the income statement. If the building has a cost of $600,000 and a useful life of 30 years, then (assuming no salvage value and straight-line depreciation) each year $20,000 of cost is removed from the asset section of the balance sheet and will appear on the income statement as depreciation expense. (This in turn reduces owner's equity and keeps the balance sheet in balance.)

The interest on debt that is capitalized will not be expensed during the year of construction. Instead, it is added to the cost of the building (capitalized) and will be part of the annual depreciation expense occurring during the building's 30-year life.

In summary, capitalize means to add an amount to the balance sheet. Depreciate means to systematically remove an amount from the balance sheet during the asset's useful life.

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