What it means to capitalize something

What it means to capitalize something

Posted May 30, 2011 0:43 UTC (Mon) by giraffedata (subscriber, #1954)
In reply to: What it means to capitalize something by jhhaller
Parent article: Scale Fail (part 2)

With capitalization, it's quite easy to get oneself into a bind, where last year you bought a huge amount of equipment, this year you fixed the software bottleneck which makes the extra equipment no longer necessary. But, your organization will be paying the depreciation on that now useless equipment until its fully depreciated or you sell it.

And that's the whole reason buying stuff with capital dollars is often better than buying stuff for which you have to use expense dollars. You certainly won't hold onto that equipment you're not using anymore and keep paying for the depreciation. You'll sell it and get back some of what you originally spent. But if you had originally spent money on consulting instead of hardware (and the consulting wasn't capitalizable), you're stuck. The money is gone forever. That's why Management is more willing to authorize hardware purchase than consulting.

Obviously, you can do the accounting incorrectly and make it look like some decision is better when it's not -- for example, depreciating equipment over 7 years when you know it will be worthless in 4.

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