Do You Accrue for Capitalized Expenses?selling my business Vincent Murphy business broker boston ma

Do You Accrue for Capitalized Expenses?

Vincent Murphy business broker Boston MA

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• 1GAAP Rules for Capital Expenditures
• 2Accounting Rules for Expensing Vs. Capitalizing & Amortizing Costs
• 3GAAP: Accounting Rules for Capitalizing Costs
• 4How to Determine Assets and Expenses for Accrual and Cash Accounting

One of the most important rules in accounting is the matching principle. This rule requires that revenues be recorded in the same periods as the expenses spent to produce them, just as it requires expenses to be recorded in the same periods as the revenues produced through them. Capital expenditures are capitalized as assets due to this accounting rule, as is their subsequent depreciation or amortization depending on how they are capitalized.

Capital Expenditures

Capital expenditures contrast with expenses in that they produce benefits for the business across multiple periods rather than one. As such, their value needs to be expensed across the multiple periods in which they remain useful, in compliance with the matching principle.

Capitalized Expenditures

Capital expenditures are capitalized so that their values can be expensed across multiple periods to reflect their lasting usefulness. In each period that passes, the business must record the expenditure's impact on its operations at the period’s end. Although businesses must do the same for accrued expenses, this does not mean that capitalized expenditures count as such.

Accrued and Prepaid Expenses

Accrued expenses refer to expenses that have occurred but for which no cash has been paid. In contrast, prepaid expenses refer to expenses that have been paid but have yet to be used. Capitalized expenditures and their subsequent depreciation or amortization are much closer to being prepaid expenses than to being accrued expenses.

Expensing of Capitalized Expenditures

The expensing of capitalized expenditures across their useful lives is done by either depreciation or amortization. Depreciation and amortization are the processes used to conduct this process for tangible and intangible assets respectively. In both cases, a portion of the capitalized expenditure's value is calculated to be used up in each period and then recorded as either depreciation or amortization expense. This process continues until the capitalized expenditure's usefulness to the business is concluded and its value exhausted through either depreciation or amortization.
by Alan Li