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What Does it Mean to Capitalize on an Asset?

Businesses use accounting principles as guidelines when recording financial transactions that occur during normal operations. Special terminology, such as capitalizing an asset, designates another feature of accounting. This term relates to a specific method of recording a transaction.

  1. Defined

    • Capitalizing an asset means recording a transaction normally deemed an expense as an asset. For example, purchasing a truck is an expense of capital, but it adds value to the company, making it an asset. A company reports expenses on the income statement and assets on the balance sheet.

    Features

    • Recording expenses as assets typically requires companies to set dollar limits for capitalization. A small business with monthly sales of $15,000 may capitalize purchases over $500. Larger companies with $350,000 in monthly sales may set limits of $5,000, as anything less is immaterial to the company's income.

    Considerations

    • Companies may need to capitalize lease agreements. The general rule for capitalizing a lease applies when the lease contains a purchase agreement or the company will use more than 75 percent of the item's useful life.

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