16 Nov Fixed Asset Capitalization Policy
Fixed Assets Capitalization Policy
Although this question is primarily accounting policy in nature, the answer is important when determining if the fixed asset section has been handled properly. A capitalization policy is a materiality threshold for when a purchase is recorded as an asset versus expensed in the current period. The general rule is: If an asset has a life that exceeds one year, it is an asset. For example, a computer or a garbage can has a life of greater than one year where as a pad of paper does not. The capitalization policy is determined based on the size of the company and the typical size of expenditures. In our previous example, capitalizing a $10 garbage can (and depreciating it $2 a year for the next five years) does not make sense from the standpoint of keeping track of it, placing it on the schedule for tax return purposes, and making the entry each year to depreciate it. A $2,500 computer system, on the other hand, should be handled properly. For most small businesses, the limit is usually around $500. A discussion with a tax accountant can be helpful in determining what the threshold should be.