Capitalization is a process wherein, the expenses related to the asset are not being treated in profit and loss account but instead, the same are being added in the value of the asset then, and it is going to be a scenario that the organization is being capitalization the asset. Capitalization occurs at the time when the value of the asset is not being consumed for a long period of time. If there is the purchase of stationary in the office then, the same is being consumed in a small period of time. On the other hand, if, there is the purchase of computer then, it is not going to be consumed by the organization in a short period of time. This is going to influence the fact that whether the asset is to be capitalized or not. Here, the company will charge the value of computer for a particular period of time in small parts so that, capitalization is being carried out without any kind of issue or trouble arising.
The concept of capitalization is being related to the concept of materiality. If the organization things that, the cost of the asset is too small then, it is going to be a scenario that the organization will treat it as an expense. It also depends on the size of the company. If the size of the company is very large then, it is going to be a scenario that the organization will not be considering the expense to be capitalized. An important point in the area of capitalization is that it helps in adding up of the cost. The value of the asset will keep on increasing with the increase in the level of capitalization. If the organization has taken a loan for development of a building then, it is going to be a scenario that the organization will be adding up the interest expense in the cost of the building. This is going to work in a way that, cost of the building will increase gradually.
Time of Capitalization or Expensing
If the cost is already being used and there is no measurable economic cost then, the money being spent should be treated as an expense instead of capitalization. If an organization has paid wages to the workers then, the workers are not going to have any further value. This is going to influence the organization in a way that, it would not capitalize such expenses. If the cost has not been used fully and the cost has future economic value left then, it is going to be a scenario that the cost would be used in the area of capitalization. For example, if, there is a truck then, its value is going to be capitalized as it is going to be used by the organization for a longer period of time by it.
The difference in Depreciate and Capitalize
There are certain differences in the concepts of depreciation of a particular asset and capitalization of the asset. In the case of depreciation, the value of the asset is being reduced gradually by way of the fact that, it is being depreciation either by a fixed percentage or by a fixed amount. The organization could be using either fixed line method of depreciation or written down value method for the purpose of making sure that the organization is doing the tasks in a proper and appropriate way. In both these cases, the method of depreciation is going to be different and the organization will be required to analyze the method in a proper way for attaining better results.
Capitalization is a method of summing up of an amount in the balance sheet of the organization. Here, the expenses being incurred by the organization are being added to the cost of the asset. If the organization is building a building then, the interest incurred by it towards the same is going to be working in a way that, it is being added up to the value of the building. Therefore, the difference in capitalization and depreciation is that the former increases the value of the asset and latter decreases the value of the asset gradually.
Limit of Capitalization
Capitalization is being carried out of the assets being purchased by the organization. In the course of capitalization of the assets, it is being identified that the organization will in a normal sense add up the expenses to the value of the assets. There is no limit to which capitalization is being carried out within the organization. The organization should ensure that the limit to capitalization is neither very low nor it is very high. This way, the organization has to ensure that, it appropriately makes a selection of limit if capitalization. If the organization keeps very high limit then, it would be required to vary the profits to a larger extent. On the other hand, if the limit is low then, issues might arise to the organization.
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