What does capitalizing an expense mean?

Capitalizing an expense involves recording it as an asset on the balance sheet rather than recognizing it as an expense on the income statement immediately. This accounting practice is applied to costs that provide long-term benefits to the company, such as property, plant, and equipment. By capitalizing these expenses, the company spreads out the recognition of the financial impact over the useful life of the asset through depreciation or amortization. This method aligns with the matching principle, which aims to match revenues with the expenses incurred to generate them over time.

In contrast, expenses that do not provide long-term benefits, such as routine maintenance or operational costs, would be recorded as immediate expenses that reduce the current period’s net income, rather than being capitalized. This differentiation is crucial for accurate financial reporting and management decisions.