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Question:
How does a company decide when to capitalize or expense a purchase?
Answer:
If the asset purchased has a useful life of over one year, then it is capitalized. This means that it is put on the Balance Sheet as opposed to showing up as an expense on the Income Statement. If the asset is capitalized, it is then depreciated or amortized over a certain amount of time.
An example of a purchase that would be capitalized is a factory or piece of machinery.
If the purchase has a useful life of less than one year, then it is expensed and shows up on the Income Statement as a normal expense.
An example of a purchase that would be expensed is a raw material for a manufacturing company or a finished good for a retail company.
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