Capitalization and Depreciation - Research Paper Example

If a company, for example, pays $20,000 in cash for equipment, its financial statements will not show that it spent $20,000. The statement will instead show that it converted $20,000 cash into $20,000 worth of equipment which is an asset. Expensing costs refers to reporting them on the income statements as outflows of money. When a company pays $12,000 for rent arrears, its financial statements indicate that money has been spent. Expenses decrease a companys profit or net income. The more costs businesses capitalize on rather than expense, the higher the profits they report to shareholders (Bragg 2007).

GAAP refers business assets as the things the business controls or owns and have measurable economic value. When something does not fit in the description of an asset, it cannot be capitalized. Buildings, land, equipment, stocks, bonds, and items held in the inventory have future economic value that is measurable hence can be capitalized as assets. Other costs incurred in advertising, research, development, and marketing should be expensed. Although such costs are meant to produce future value, such value cannot be measured or evaluated at present (Jarnagin 2006).

GAAP enables a company to capitalize the costs of acquiring assets and preparing them for use. Suppose a production company purchases a $13 million machine from a manufacturer in Italy. The company can capitalize on the buying price of the machine and also capitalize on the costs incurred in transporting the equipment from Italy. Assemblage costs, costs due to necessary modifications on the machine, taxes and tariffs paid for the equipment can be included on the capitalized costs. On smaller scale businesses, if a factory buys $98 in stock for investment intentions and pays a $1 commission, the company can capitalize on the full cost of acquisition cost: $99 (Weiss 2006).

When companies capitalize on assets, it does not mean or refer