Fundamental issues surrounding capitalization versus expensing?

Answer 1

I was setting up some books for a business on a new program several years ago. I went through the accounts and was assigning them a place. The man kept saying "expense, ... expense, ... expense...." His wife got tired and said, "Everything's an expense to you." Then he asked me why I didn't seem to be paying attention, "And why aren't these expenses to you?"

An asset is money or things of value that you use and continue to use to make money. A paint sprayer is a tool, an asset, the paint that goes in it is not--you use it and its gone. The same for the office. Buying phones and staplers is investing in the tools to do your business. Buying telephone service and staples, while you use them in your business to build your business, are used up when you do your business.

If you are adding a tool to make your product, that gets capitalized. If you have to pay for the power or fuel to run that machine, that is expensed. If you have to buy more blades or bits or whatever because they get used up in doing your business, that is expensed. If you have to buy a sharpener to keep you from using up blades or bits so quickly, that is capitalized. If you buy a building to house the work you do, that is capitalized. If you buy insurance to pay for damages to the building, that is expensed.

Answer 2

Useful life
Type of property