Final answer:
When a cost is capitalized, it is recorded as an asset, not an expense. This implies that the expenditure is invested in an asset that provides long-term value rather than being immediately expensed, relevant to items like buildings, machinery, or software. Capital also includes intellectual discoveries and excludes financial capital like money.
Step-by-step explanation:
If a cost is capitalized, it is recorded as an asset not an expense. This distinction is key in the field of accounting and business where the allocation of costs can greatly impact financial statements. Capital expenses are costs that are invested in an asset that will provide value over a longer period, rather than being expensed immediately. These costs are typically associated with acquiring or improving fixed assets, such as office buildings, machinery, and computer software, which are used in the production of goods and services.
Capital does not only refer to tangible physical objects; it also encompasses intellectual discoveries like a score for a symphony or software used by businesses. These items are considered capital because they can be used repeatedly to produce goods or services, meeting the two criteria for being capital.
It's also important to understand that financial capital, including money, stocks, and bonds, is distinct from other forms of capital because these financial assets themselves do not produce goods or services but can be used to purchase production capabilities.
In terms of cost accounting, we can also distinguish between fixed costs and variable costs. Fixed costs relate to the expenditure on fixed inputs (e.g., capital) and do not change with the level of production. An example of a fixed cost would be rent for the office building. This illustrates how fixed costs are interlinked with capital, further entrenching the importance of understanding what is capitalized versus expensed in a business context.