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Capitalisation

CMA RAVI (ASSISTANT MANGER - FINANCE) (478 Points)

25 December 2012

What is meant by capitalisation....how do we capitalize expense??

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Giridhar S Karandikar (Team Lead) (7543 Points)
Replied 25 December 2012

Capitalization of expenditure means showing it in the Balance Sheet of the organization. The items of expenditure which are not dealt in the ordinary course of business are treated as B/S items. For instance if an organization purchases machinery for manufacturing its product, then in this case machinery is being used to produce the products which are dealt in teh ordinary course of business. So all the expenses incurred in relation to production of the product are charged to P&L Account. Now here whihc is an item of Fixed Asset is capitalized i.e. it is shown in the B/S under the heading Fixed Assets. Then every year depreciatin is being claimed on the all the itmes of machinery at the rates specfied. The depreciation is charged to P&L account and hence the value of machinery shown in teh B/S keeps on decreasing every year.

With regards to capitalizaiton of expenses, say if we incure any expenditure on the building. Now here if the expenditure incurred is able to increase the life of the building then we need to capitalize the expenditure to building account i.e. add the expenditure to the building account appearing in teh B/S and then claim depreciation on teh building whihc is charged to P&L Account.