Capitalized Cost

The term "capitalized costs" refers to an accounting method. The costs themselves are expenses related to a building or another fixed asset that will depreciate over time. These costs are added to the cost basis of the asset. They are accounted for in the depreciation of the asset, or amortized over the life of the asset ("life" being the period the asset is used). This technique represents a type of accounting known as the "accounting matching principle," where the accountant tries to match the item cost with when it was used.

The capitalized cost sounds just like a regular expense, right? Not quite. Expenses are monies that leave a company (you give it to someone else). Capitalized costs are monies that are reinvested in the company (such as buying something, like a building).

For instance, if the business pays an utility bill, that money is gone from the business forever. The company got use of electricity for a month, but nothing permanent or even long lasting was added. The utility has been consumed, the money spent. If the business buys a building though, they keep that building, and can spread that cost out (amortize it) over the time they own the building.