How to Capitalize an Asset & the Income Statement

by Keela Helstrom

When a fixed asset is capitalized at the time of installation, it simply means that the asset's total cost is gradually "depreciated," or expensed over future periods instead of the total cost being expensed at the time of installation. The total cost of the capitalized asset is shown in the asset section of a corporation's balance sheet, but the depreciation charges related to the assets are shown on the income statement.

Determine the Capitalizable Costs

Add up the total costs incurred to obtain the asset and prepare it for use. Include in the calculation the invoice costs, shipping costs and installation costs of the asset. For example, if the asset was invoiced to the corporation for $38,000, and the company incurred $4,000 in delivery costs and $3,000 in installation costs, the corporation should capitalize the asset's cost as $45,000.

Prepare the Journal Entry

Prepare a journal entry to capitalize the total costs you've calculated. Increase the general ledger asset account with a debit on the first line of the entry. On the second line, record the offsetting decrease in the general ledger cash account with a credit.

Example of Capitalization

Assume that a corporation purchases a piece of machinery to further new operations. The total costs incurred to purchase the asset and prepare it for operations is $18,000. The journal entry will appear as follows: Debit Machinery & Equipment 18,000 Credit Cash 18,000

Recording the Journal Entry

Post the entry to the company's books, and print a copy of the trial balance to confirm that the entry posted correctly. The value of the capitalized asset will appear in the value of the corporation's machinery and equipment on the balance sheet for the reporting period. The income statement will not be affected at the time of capitalization.

The Income Statement

The total cost of the asset will be expensed, or depreciated, over the time it remains in use. The resulting depreciation expense will be included on the corporation's income statement at the end of the corporation's reporting period. The actual amount of the expense varies based on the depreciation method used for the particular asset, the time the asset will be useful to the company and the value of the asset after it is no longer considered useful.

Example of Income Statement Impact

To illustrate the impact to the income statement from the depreciation of a capitalized asset, assume the $18,000 asset in our example will remain in use for three years and have no remaining value after this time. Assume also that the corporation uses the straight-line method to depreciate the asset, a method that allocates the asset's total cost evenly over the number of years the asset remains in use. The impact to the income statement each year would be an expense of $6,000, or $18,000 total cost divided by three years.

About the Author


Photo Credits

  • Comstock/Comstock/Getty Images
bibliography-icon icon for annotation tool Cite this Article