An asset should be capitalized when it meets two key criteria:
The asset has a useful life that extends beyond the current accounting period. In other words, the asset is expected to provide economic benefits to the business for more than one accounting period.
The cost of the asset exceeds a certain threshold, known as the capitalization threshold. This threshold represents the minimum cost that an asset must meet in order to be capitalized rather than expensed. The capitalization threshold can vary depending on the size and nature of the business.
When an asset is capitalized, it is recorded on the balance sheet as a long-term asset and the cost is spread out over its useful life through depreciation. This is different from expensing the cost of the asset, which would result in an immediate reduction in income in the current accounting period.
It's important to note that not all expenditures related to an asset should be capitalized. Only the costs directly related to acquiring or constructing the asset should be capitalized. For example, expenses related to routine repairs and maintenance should be expensed as incurred.
In summary, an asset should be capitalized when it has a useful life beyond the current accounting period and the cost of the asset exceeds the capitalization threshold. By capitalizing an asset, the cost is spread out over its useful life, which can help to better match expenses with the revenue generated by the asset over time. Contact your Herriman CPA or a CPA near me to ask any questions you may have about whether an asset should be capitalized or not.
Comments