Capitalization

When a business spends money, it must decide whether the spending is an expense that relates only to the current period or an investment that will provide benefits for years. If it is the latter, the cost is capitalized: recorded as an asset and then gradually charged to the income statement through depreciation or amortization.

For example, a company that spends 120,000 on a new machine expected to last ten years capitalizes the 120,000, then records depreciation of about 12,000 a year. By contrast, 2,000 spent on routine repairs is expensed immediately, because it maintains the asset rather than improving it.

Costs commonly capitalized include equipment, buildings, major improvements, certain software development and, under some rules, interest on money borrowed to build an asset.

Capitalization decisions affect reported profit. Capitalizing a cost raises current profit, because the full cost is not expensed at once. This makes capitalization policies an area that auditors and analysts watch closely.

This meaning is different from market capitalization, which is the total market value of a company's shares.