Question

How does a company accountant decide whether an expenditure should be capitalized or expensed?

Answer 1

If an expenditure is considered as an asset and added to the balance sheet, it is known as capitalizing. On the other hand, if an expenditure is considered as an expense and added to the income statement, it is known as expensing.

While deciding the nature of the expenditure, if the expenditure or cost incurred is going to provide benefit in the long run, then it will be considered capitalized expenditure. For example, repairing cost of machinery will be capitalized. If the expenditure is not going to reap any direct benefit in the long run it will be expensed. For example, transportation cost would be expensed.