Definition: A Capitalized Cost is the cost incurred in the purchase and financing of fixed assets. It includes not only the price paid for an asset but also the expenses incurred on its installation and transportation.
A capitalized cost is added to the fixed assets and is shown on the assets side of the balance sheet. These costs are not deducted from revenues during the period in which these are incurred, but, however, the deductions are made over a period of time in the form of depreciation, depletion, amortization.
Initially, a capitalized cost is recorded as assets and thereafter is treated as an expense. The expenses that can be capitalized by the companies are acquisition and installation of assets, labor charges incurred in building an asset, interest paid on finance taken for the construction purposes, materials used to construct an asset, transportation cost incurred in bringing the asset to the site, etc.
By Capitalizing these expenses, a firm gets a clear picture of a total amount incurred on investment in assets and helps in determining the revenue earned over a period of time. The expenses reduce the net income, so a company capitalizes more and more of expenses thereby having more profits. But however, more profits attract more taxes, so a small company does not capitalize more expenses and try to maintain a balance between the costs incurred.