Capitalization limit can be defined as the dollar amount that a business paid for an asset. The asset for which capital is paid by the business is recorded as the long term asset. However if the business pays less than the capitalization limit of the asset an expense is charged on the asset during the incurring period.
Capitalization limit can be defined as a threshold at which the business entity capitalizes it’s already purchased and constructed asset. If the assets are not capitalized they are charged as expense instead of assets. The capitalization limit is not defined or pre-designed and a business has to carter a number of factors while setting the capitalization limit.
In such a case if the capitalization limit is extremely low business will convert some of the expense into the fixed assets. These assets are charged off at once so that the profit of the business seems to be a bit higher. The low capitalization limit will results in the increased depreciation in the later years of the asset life. If the capitalization limit is set too high by the business a few assets will be recorded as fixed assets in the accounting register that will result in decreased work load on the accounting staff of the business. A high capitalization limit will result in a varying month to month profit as a number of big tickets assets will be considered as the expense.
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