Capitalization
Definition
Capitalization means recording a purchase as a fixed asset on the Balance Sheet instead of as an expense on the P&L. This happens when the item has a long useful life and significant cost.
Example
A business buys a $12,000 piece of equipment expected to last five years. Instead of recording the full $12,000 as an expense, it capitalizes the equipment and depreciates it over time.
Why It Matters
Capitalizing vs. expensing affects profit. Expensing a large purchase all at once makes profit look much lower in that period.