An asset that an entity acquires or creates for long-term use, while accounting for the expense incurred over multiple years to come. An example is when an entity acquires a piece of machinery that has a useful life of 6 years. An entity capitalizes the asset (adds up its acquisition price and all associated costs), and then spreads the total cost over the entire useful life, deducting a portion of it each year for the next 6 years, rather than charging the entire cost to the year of acquisition.
For an asset to be capitalized, it needs to fulfill a set of criteria including 1) ownership (by means of acquisition, not rent) 2) use in operations or business activities, 3) a determinable useful live (exceeding one year).
Examples of capitalized assets include buildings, (but not land: it cannot be capitalized), machinery and equipment, vehicles used for business purposes, computers, and the like.
Such assets are usually depreciated using the straight line method (equal amounts each year) or the declining balance method (higher depreciation rates in early years).
Comments