Question

Why do Accounting standard tend to force capitalization?

Answer 1

Capitalisation is must for expenses which are going to provide long term benefit because as per accrual concept, Expense incurred should be matched with year in which it accrues. For eg. An asset purchase of 100000 $ needs to be capitalised because if it is not capitalised in current year and instead expensed in current year, there would be massive loss and distortion of fair P&L .

An asset is to be used for long term and business will reap its benefit for several years so it is beneficial if the cost is distributed over the period.

Hence capitalisation is very important concept in Accounting Standard.