Asset Capitalization
An asset refers to any resource having a monetary value that is owned by your organization. Tangible assets such as laptops, buildings, furniture, etc. that are purchased for the long term and utilized to generate revenue are called fixed assets.
ERPNext simplifies fixed asset management with features like asset capitalization.
Capitalization refers to the process of recognizing 📄 expenses as assets on the balance sheet rather than as expenses on the income statement. Through capitalization, expenses related to an asset can be recorded over its useful life through depreciation 📉 instead of recording the full expense in the year the asset was bought.
Consider the following example:
You have decided to purchase machines ⚙️ worth $100,000 for your company to upgrade its production capabilities. Additionally, the supplier has charged $5000 for transportation and $5000 for setting up the machines. You can capitalize these costs to align the time frame for cost identification to when benefits are received. By doing so, the costs incurred would be added to the machine’s value, enabling you to depreciate the entire capitalized amount of $110,000 over the lifetime of the machine.
This approach is in line with generally accepted accounting principles (GAAP) and provides a more precise representation of your company's financial position and performance.