When should you capitalize a purchase rather than expense it?

• A. If the asset has a useful life over 1 year, it is capitalized and depreciated or amortized.
• B. If the asset is small in cost, capitalize.
• C. If the cash outlay is immediate, capitalize.
• D. Only if the asset is intangible should it be capitalized.

Answer: (A)

In accounting, what you capitalize depends on how long the asset will provide benefits. If a purchase will be used in operations for more than one year, it belongs on the balance sheet as an asset and is depreciated (for tangible items) or amortized (for intangible items) over its useful life. This spreads the cost over the periods that benefit from the asset and follows the matching principle. If the item only benefits the current period or is immaterial, it’s expensed instead, impacting the income statement now. The timing of cash payment doesn’t determine capitalization, and both tangible and intangible assets with finite lives can be capitalized, not just intangible ones. Therefore, the best rule is: capitalize when the asset has a useful life over a year and depreciate or amortize it.