Which item would typically be capitalized?

Which item would typically be capitalized?

• A. Factory equipment
• B. Salaries
• C. Advertising expense
• D. COGS (cost of goods sold)

Answer: (A)

Capitalization means recording an expenditure as an asset on the balance sheet when it will provide benefits beyond the current year. Factory equipment fits this, because it’s a long-lived asset used in production over many years and is shown as part of property, plant, and equipment. It is not expensed all at once; instead, its cost is depreciated over its useful life, spreading the expense over the periods that benefit from it. Salaries, advertising expense, and COGS are typically recognized as expenses in the period they are incurred or incurred events occur. Salaries are day-to-day operating costs; advertising expense is the cost of marketing efforts for the current period; and COGS represents the costs directly tied to goods sold and is expensed when those goods are sold.

Capitalization means recording an expenditure as an asset on the balance sheet when it will provide benefits beyond the current year. Factory equipment fits this, because it’s a long-lived asset used in production over many years and is shown as part of property, plant, and equipment. It is not expensed all at once; instead, its cost is depreciated over its useful life, spreading the expense over the periods that benefit from it.

Salaries, advertising expense, and COGS are typically recognized as expenses in the period they are incurred or incurred events occur. Salaries are day-to-day operating costs; advertising expense is the cost of marketing efforts for the current period; and COGS represents the costs directly tied to goods sold and is expensed when those goods are sold.