Capitalize
Candlefocus EditorTo further explain the concept of capitalization, the International Financial Reporting Standards (IFRS) provide a definition. According to IFRS, capitalization occurs when recognition of an expense is deferred and the item is recorded on the balance sheet as an asset. There are two elements to capitalization – the timing element, which is the deferred recognition of an expense and the form element, which is the recording of the item as an asset.
Capitalization is a relatively common occurrence in business accounting. For example, when a company purchases a piece of equipment, the purchase price of the asset would be recorded on the balance sheet and would not be recognized until the cash outlay actually occurs. Another common example involves research and development costs for a new product. Companies tend to capitalize these costs as opposed to expensing them immediately on the income statement as the product moves through developmental stages. As the product becomes available for sale, the asset is "written off" in a series of small payments.
Overall, capitalization is a beneficial concept for businesses as it allows for matching of the timing of the cash flows to the accounting periods in which the expense is incurred. Even though an expense is recorded on the balance sheet, it does not become an expense until cash payments are actually made, which helps to prevent misstatements of financial performance. For these reasons, capitalization remains an important part of a company's accounting strategy.