Free «Accounting - Capitalization versus Expensing» Essay Sample

To begin with, capitalization and expensing refer to the costs incurred by organizations while carrying out business activities. In other words, capitalization and expensing revolve around the expenditure of a company or organization. In the same line of thought, expensing in the field of accounting refers to the cost incurred by an organization during which short lived economic benefits are enjoyed. On the other hand, a capitalized expenditure normally concerns with permanent assets like buildings and equipment which must appear in the balance sheet. In essence, the difference between expensing and capitalization is the time during which economic benefits are enjoyed (Raiborn & Raiborn, 2009)).

As a matter of fact, expensing yields short term values which may never be of any benefit in future. For this reason, managers would prefer capitalization expenditure in their companies. This is because any company would be interested in investments that can continue to yield good returns for a long time. In this case, the company can at least have a lot of assets to rely on in future in case of any risks incurred. In addition to this, capitalized assets carry a lot of monetary value hence enabling a company to grow (Zack, 2009). Apart from this, capitalized expenses also have impending tax reimbursement which can really add value to the company’s expenditure. In addition to this, interest charges diminish in value over time in capitalization and may end up costing less hence enabling a company to increase its savings.

On the other hand, capitalization can also be preferable to auditors. This is because capitalization does not entail a cumbersome effect on the income and income statements as compared to expensing which involves short lived economic benefits (Stice, Stice & Albrecht, 2007). For this reason, auditors will have an easy time in their auditing since the expenditures of a company are not burdensome and records can be easily traced.


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