To capitalize an expenditure is to:
A Increase the revenue account.
B Decrease an expense account
C Increase an expense account
D Increase an asset account
The correct answer and explanation is :
The correct answer is D: Increase an asset account.
Explanation:
To capitalize an expenditure means to record the expenditure as an asset rather than as an expense. This decision has important accounting implications, as it affects how the cost is recognized over time on the financial statements.
- Capitalization of Expenditure:
When a business capitalizes an expenditure, it treats the cost as part of the value of an asset, rather than as a one-time expense. This is typically done for significant expenditures that provide benefits over a period of time, such as the purchase of property, equipment, or other long-term assets. - Impact on the Financial Statements:
Capitalizing an expenditure leads to an increase in the asset account on the balance sheet. For example, if a company buys machinery, it will record the cost of that machinery as an asset under the “Property, Plant, and Equipment” section of the balance sheet. Over time, the company will then depreciate the asset, which spreads the cost of the asset across its useful life. - Why Not the Other Options?:
- A: Increase the revenue account: Capitalizing an expenditure does not affect the revenue account. Revenue typically arises from the sale of goods or services, not from capitalizing costs.
- B: Decrease an expense account: Capitalizing an expenditure does not involve directly decreasing an expense account. In fact, it defers the expense to future periods via depreciation or amortization, spreading the cost over time.
- C: Increase an expense account: Capitalizing an expenditure does not lead to an increase in expenses. If the expenditure were immediately expensed, it would increase the expense account, but that’s not the case when capitalizing.
In conclusion, capitalizing an expenditure increases an asset account, as it recognizes the expenditure as a future benefit rather than a current cost. This approach helps match costs with the revenues generated over the asset’s useful life.