Capitalization Cost

Capitalization Cost Definition

Capitalization Cost is an expense that is made by the company to acquire an asset which they will use for their business and such costs are shown in the balance sheet of the company at the year-end. These costs are not deducted from the income but they are depreciated or amortized over the period of time.

Explanation

Capitalization Cost

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For eg:
Source: Capitalization Cost (wallstreetmojo.com)

Examples of Capitalization Cost

How to Calculate Capitalization Cost?

Journal Entry

We treat it as an asset for the company, which will be depreciated over some time. In the books of accounts, we have to debitDebitDebit is an entry in the books of accounts, which either increases the assets or decreases the liabilities. According to the double-entry system, the total debits should always be equal to the total credits.read more the asset with the purchase amount and credit the account, which paid for the asset, i.e., Cash or Bank a/c.

Advantages

Disadvantages

Conclusion

It helps the organization when it comes to investment, which the company makes in big assets, and that asset, if, qualifies the criteria should be capitalized. Still, on the contrary, the company should take extra care while finalizing its accounts because all big expenses related to the assets cannot be considered as Capitalization Cost, and that has to be expensed off during the period it is incurred.

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