Cost, Capitalization and Expense Susan Renkosik Monday, March 11, 2013 Tony Taylor CPMGT/303

When an owner or small business needs to decide whether to deduct an expense in full or capitalize and amortize it can be a difficult decision. The accounting action taken on a major purchase can make a difference on the year-end income statement, which will show a profit and the one that will show a loss. It is important to understand the different methods and how they can affect the income statement and to learn the rules that must follow to meet the requirements from the Internal Revenue Services will make the decision less of a task. Our organization is continuing to grow and has decided to start looking for a new building to purchase. This would allow for expansion in our warehouse as well as the office space. The current building is too small for us to add additional manufacturing lines to build our products. In order to purchase the building it is important for the organization to understand how to amortize the cost for the building. When making a purchase the first step is to record the total amount at the time the expense is encountered. When using the cash method the expense is recognized when the payment is made. If using the accrual method the expense is recognized when incurred, even if the amount is not paid for in a month or two. It is important to following the account principles, or GAAP otherwise the ratio for income to expense can be skewed significantly. It is required to capitalize certain costs to help guarantee that revenue and expenses are recognized within the same period.