Capitalization is also known as capital structure or invested capital. The distribution of equity, debentures, etc., included in the capital of a company, which reflects the ratio of the various creditors' interests to the owners' interests in the company.

Expensing is an accounting term that mainly refers to research and development expenditures that are fully expensed in the period in which they are incurred, reflecting the principle of sound accounting.

Difference: Expensing is to charge the money spent to expense accounts such as administrative expenses, and capitalization is to count the money spent on a specific asset, such as in order to develop an intangible asset development phase of the money spent on intangible assets are generally included in the cost of the intangible asset.

Conditions for capitalization

There are three conditions for capitalization to begin:

The first condition is that the expenditure on the asset has already occurred. This condition means that the expenditure on the acquisition or construction of fixed assets by the enterprise has been incurred, including expenditure incurred in the form of cash payments, transfer of non-cash assets and assumption of interest-bearing debt.

Payment of cash refers to the payment of expenditure on the acquisition or construction of fixed assets with monetary funds. Transfer of non-cash assets refers to the use of non-cash assets for the purchase and installation of fixed assets.

The second condition is that borrowing costs have been incurred. This condition means that the enterprise has already incurred the borrowing costs of the money borrowed specifically for the acquisition or production of assets eligible for capitalization, or the borrowing costs of the general borrowings taken up.

The third condition is that the construction or production activities necessary to bring the asset to its intended use or saleable condition have begun. The "construction or production activities necessary to bring the asset to a predetermined state of use or sale has begun" mainly refers to the assets eligible for capitalization of the physical construction or production work has begun, such as the installation of the main equipment, the actual start of construction of the plant and so on. It does not include the mere holding of the asset without the physical construction or production activities to change the form of the asset.

An enterprise can start capitalizing borrowing costs only if the above three conditions are met simultaneously, and borrowing costs cannot start being capitalized as long as one of the conditions is not met.

Expensing: Interest expensed upon completion.

Expanded:

Capitalization example:

Capitalization is the process of amortizing an asset as an asset (especially a fixed asset, an intangible asset) only over time and not directly into the current year. Can not directly give all to the current profit and loss. For example, the portion of borrowing costs charged to construction in progress is capitalized and recorded as a fixed asset and amortized over time.

In addition, the interruption

Accounting standards for the suspension of the capitalization of borrowing costs to make provisions for the time, eligible for capitalization of assets in the process of acquisition or production of abnormal interruptions, and interruptions in more than three consecutive months, the capitalization of borrowing costs should be suspended. The reason for the interruption must be abnormal interruption, belonging to the normal interruption, the related borrowing costs can still be capitalized.

Non-normal interruptions, usually due to business management decision-making reasons or other unforeseen reasons and other interruptions. For example, the interruption of asset purchase and construction or production activities due to quality disputes with the constructor, or failure to supply materials for construction or production, or difficulties in liquidity, or safety accidents in construction or production, or labor disputes related to asset purchase and construction or production, are all considered abnormal interruptions.

Non-normal interruptions are significantly different from normal interruptions. Normal interruption is usually limited to the acquisition or production of assets eligible for capitalization to achieve the intended use or sale of the necessary procedures, or foreseeable force majeure factors caused by the interruption. For example, the construction of certain projects must be suspended at a certain stage to carry out quality or safety inspections, and only after the inspection is passed can the construction of the next stage continue, such interruptions can be foreseen before the construction, and is the construction of the project must go through the procedures, is a normal interruption. It is also a normal interruption when the construction of a project in certain areas is halted due to foreseeable force majeure factors (such as the rainy or freezing seasons, etc.) during the construction process.

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