When it comes to accounting, capitalization is a process that allows businesses to postpone the recognition of certain costs as expenses until a later period. This means that the cost of an item can be included as an asset on the company's balance sheet, and then gradually charged to expenses over a longer period of time. However, there are certain costs that cannot be capitalized, and it is important for businesses to understand what these are in order to ensure accurate accounting. Expenses that must be borne in the current period and cannot be capitalized include items such as utilities, insurance, office supplies, and any item below a certain capitalization threshold.
These are considered expenses because they are directly related to a particular accounting period. Capitalized costs can include the expenses of intangible assets that can be capitalized on, such as patents, software creation, and trademarks. In addition, capitalized costs include transportation, labor, sales taxes, and materials. If the Board of Trustees or other appropriate approvers approve non-capitalizable costs as part of the project cost and are documented in Form 1, expenses may be charged to the project but not capitalized.
In these cases, non-capitalizable expenses should be codified in task 121 (a non-capital subtask) and an appropriate type of expenditure such as 56065 (non-capitalizable expenses), 52240 (employee morale), 52310 (alcoholic beverages), 52315 (entertainment), or 52210 (gifts for employees), as appropriate. The expenses charged to these types of expenses are not capitalized and will require a source of funding other than debt. The Internal Revenue Service (IRS) outlines many different types of business assets that should be fully capitalized on costs. These include land, buildings, furniture, machinery, trucks, and freight and installation charges.
Internal labor costs can also be capitalized if they are specifically identifiable and are directly related to the completion of the project. These capitalized costs are transferred from the balance sheet to the income statement and are recorded as expenses through depreciation or amortization.It is important for businesses to understand which costs can and cannot be capitalized in order to ensure accurate accounting. Expenses that must be borne in the current period cannot be capitalized, while certain intangible assets such as patents, software creation, trademarks, transportation, labor, sales taxes, and materials can be capitalized on. The IRS also outlines many different types of business assets that should be fully capitalized on costs.