Question

If I purchase a new asset today (like a computer or piece of machinery), what does it really mean if I capitalize it versus expense it? What's the implication of this on my books (accounting records)?

Answer 1

The difference between capitalize and expenses is

When the cost incurred on the asset is capitalised, a part of such cost will be treated as expenses in the form of depreciation. By depreciating the asset over its useful life, the cost incurred is gradually allocated to the respective years over the useful life of the asset. The net profits will not have any impact because the cost of the asset is not treated as an expense in one year only.

When the cost incurred on the asset is treated as an expense, the entire cost is charged as an expense in one year only. This alternative will reduce the net income drastically when compared with capitalising. Huge amounts invested in assets are being recorded as expenses and will reduce the net income drastically.

The impact will be on net income.