What is Capitalized Cost?
297 Views · Updated December 5, 2024
A capitalized cost is an expense added to the cost basis of a fixed asset on a company's balance sheet. Capitalized costs are incurred when building or purchasing fixed assets. Capitalized costs are not expensed in the period they were incurred but recognized over a period of time via depreciation or amortization.
Definition
Capitalized cost refers to the expenses recorded on a company's balance sheet as part of the cost basis of fixed assets. This means these costs are not expensed immediately when incurred but are recognized over time through depreciation or amortization. This treatment is typically applied to expenses incurred during the construction or purchase of fixed assets.
Origin
The concept of capitalized cost originated with the development of accounting standards, particularly in the early 20th century, as businesses expanded and invested more in fixed assets. The need arose for a method to more accurately reflect the value and useful life of assets. The International Accounting Standards Committee (IASC) and the Financial Accounting Standards Board (FASB) in the late 20th century provided detailed guidelines on the treatment of capitalized costs.
Categories and Features
Capitalized costs are mainly divided into two categories: direct costs and indirect costs. Direct costs include purchase price, transportation fees, installation costs, etc., directly related to the asset. Indirect costs may include interest expenses related to preparing the asset for use. The main feature of capitalized costs is that they are listed as assets on the balance sheet and gradually recognized on the income statement through depreciation or amortization.
Case Studies
A typical case is Apple's treatment of capitalized costs during the construction of its new headquarters,
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