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Why are certain costs of doing business capitalized when incurred and then amortized over subsequent accounting cycles?
Wiki User
∙ 15y ago
The answer to this question lies in the durable life of the 'cost' you incurred. Typically, the costs which are capitalised are for items which have an expected lifetime of over 1 year. We are thinking of computer equipment (hopefully, you're not going to buy a new computer every year and throw away the old one), a building (you're not going to buy it for just one year), etc. By capitalising the cost, the item is now considered an asset, and will stay on your books for the life of the underlying item. By amortising the asset, you are in fact spreading the cost of the asset over the lifetime of the asset. Example: we buy a computer for 1000 EUR, and we intend on using it for 3 years. You will mark the computer as a fixed asset (computer equipment), and amortise it over 3 years, so you are spreading the cost equally over the lifetime of the computer itself. The first year you will amortise 334 EUR, then 333 EUR, then 333 EUR.
Wiki User
∙ 15y ago
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