What is the difference between the terms capitalize and depreciate?

Definition of Capitalize

In accounting, the term capitalize refers to adding an amount to the balance sheet as an asset (as opposed to immediately reporting the amount as an expense on the income statement).

Definition of Depreciate

The term depreciate refers to systematically moving part of the cost of a plant asset from the balance sheet to depreciation expense on the income statement.

Example of Capitalize and Depreciate

Assume a corporation is self-constructing a new building next to its existing building. The corporation borrows the money for the construction from its local bank. The accounting rules state that the interest incurred for self-constructing the building should be added to the cost of the building. (The FASB refers to this as the capitalization of interest.)

Once the building is put into service, the building's cost (including the capitalized interest) is depreciated over its useful life.

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