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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.

Why is capitalizing interest important?

Capitalizing interest helps a user of financial statements, from the perspective of accrual accounting, to better allocate costs to earnings in the periods when an acquired asset is being used and obtain an accurate measure of the acquisition cost of an asset.

When does interest capitalization begin?

Generally, interest capitalization begins when expenditures for the asset are being incurred, activities necessary to prepare the asset for its intended use are in progress, and interest costs are being incurred. The capitalization period continues until the asset is substantially complete and ready for use.

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