Final answer:
Costs in business can be recorded either as expenses or assets depending on their future economic benefits. Expenses are for the current accounting period, while assets provide value over multiple periods. The process of classifying a cost as an asset is known as capitalization.
Step-by-step explanation:
When a business incurs a cost, it has the choice of recording that cost either as an expense or capitalizing it as an asset. The accounting treatment depends on the nature of the cost and the future economic benefits it is expected to bring. Generally, if the cost is associated with an item that will provide economic value over multiple accounting periods, it is classified as an asset. This is known as capitalization. Conversely, if the cost is related to the consumption of goods and services that generate economic benefit in the current accounting period, it is recorded as an expense. For example, purchasing office supplies would typically be recorded as an expense, while purchasing a piece of machinery would be recorded as an asset purchase, to be depreciated over its useful life.