Question

In this research paper, please address each of the following questions.

How is taxable income calculated in respect to capitalization of costs?

What are the characteristics of an expense for it to be capitalized?

What is the principle behind capitalizing expenses?

Should you capitalize cost for the sole purpose of minimizing the organization’s tax burden?

Answer 1

1) Capitalization of cost refers to the cost incurred is added to the cost of asset instead of charging the same to profit and loss as the cost is adding value to the asset. These cost are not allowed as deduction from profit for calculation of the taxable income.

2) The below characteristics of an expense will have to be capitalized

a) If the expense is expected to be consumed over the time

b) if the expense incurred adds value to the asset and makes the asset in workable condition

c) One time cost which are necessary to make the machine capable of operating

d) Major repairs done to the building are also capitalised

3) The principle behind capitalizing the expense is the matching principle. The matching principle means to match expenses with the revenue that is to match the cost of the asset to period in which it will be used which is opposite to when the cost was incurred.

4) No, capitalizing the cost for the sole purpose of minimizing the organisation's tax burden is not the correct approach of accounting and this could lead to future issues and assesment.