What is capitalized interest?

Capitalized interest is the cost of borrowing to obtain a long-term asset. Unlike typical interest expenses, capitalized interest is not expensed immediately on a company's income statement. Because many companies finance long-term assets with debt, companies are allowed to expense the assets over the long term.

Should interest capitalization be expensed immediately?

Otherwise, interest capitalization is not required, and it should be expensed immediately. When booked, capitalized interest has no immediate effect on a company's income statement, and instead, it appears on the income statement in subsequent periods through depreciation expense.

How does capitalized interest show up on a company's income statement?

Capitalized interest shows up in installments on a company's income statement through periodic depreciation expense recorded on the associated long-term asset over its useful life. Capitalized interest is the cost of borrowing to obtain a long-term asset.