Finance - processes - limitations of financial reports - capitalising expenses

[olivercutbill]

Capitalising expenses. This involves converting costs to assets which depreciate. How does this work? Cheers

[isaacdelatorre]

Hey,

You are right in saying that capitalising expenses is converting costs to assets. But to elaborate further; a business will not record it as an expense on the revenue statement (causes a decrease in expenses and maximises net profit) and places it as an asset on the balance sheet (overstates assets and liquidity of business). The easiest way to think about is with research and development - firms count this as an asset as it has the potential to generate profit in the long term; but currently is an expense to the business.

I have a business example if you would like. But hope this helps

[olivercutbill]

Ahh perfect. Cheers