If an asset cost is capitalized, how is it recorded on financial statements?

• A. Recorded as a liability.
• B. Recorded as an asset on the balance sheet.
• C. Recognized as revenue.
• D. Deferred as a liability.

Answer: (B)

Capitalizing an asset cost means recording the cost as a long-term asset on the balance sheet rather than expensing it immediately. The initial entry typically debits the asset account and credits cash or accounts payable, reflecting the purchase and how it was financed. The asset stays on the balance sheet at its cost and is gradually written down through depreciation (for tangible assets) or amortization (for intangible assets) over its useful life. This depreciation expense then appears on the income statement in each period, spreading the cost over the periods benefited. In short, capitalization places the cost as an asset on the balance sheet, not as a liability or revenue.