There are a few tests for whether or not something is capitalized.
First, the revenue is earned in future accounting periods. For example, you buy a delivery truck. You expect to earn money over several years with the delivery truck. To match expenses with the revenue generated, a portion of the expense of the truck is allocated to each accounting period. If the revenue is in the current period, then there's no reason to capitalize. For example, fast food worker's wages are not capitalized since the revenue is in the current period. The warehouse construction worker's salary is capitalized int he cost of the warehouse because it will earn revenue for several years.
Another test is if it's assignable to the cost of the asset. The CFO's salary isn't capitalized as part of the investment (unless the company literally does nothing else), because there are a lot of projects and it's hard to specifically assign. Selling expenses aren't capitalized because 1) the asset is complete and 2) they are assignable to the sale and not the cost of the asset. Other costs to acquire the asset, such as delivery fees, installation fees, insurance, etc. are capitalized.
Do you own the asset? If I hire a construction company to build a warehouse, they hae nothing to capitalize since they don't own the asset. I do.
And material. If I have you write a shell script that we'll use for the next five years to copy backups between our servers and Azure, and it takes an afternoon, we don't capitalize that. It's just not material.
If it's leased for 90/95% of the cost and for 90/95% of the useful life, it's capitalized. This prevents companies from treating capitalized costs as leasing expenses in the current period.
First, the revenue is earned in future accounting periods. For example, you buy a delivery truck. You expect to earn money over several years with the delivery truck. To match expenses with the revenue generated, a portion of the expense of the truck is allocated to each accounting period. If the revenue is in the current period, then there's no reason to capitalize. For example, fast food worker's wages are not capitalized since the revenue is in the current period. The warehouse construction worker's salary is capitalized int he cost of the warehouse because it will earn revenue for several years.
Another test is if it's assignable to the cost of the asset. The CFO's salary isn't capitalized as part of the investment (unless the company literally does nothing else), because there are a lot of projects and it's hard to specifically assign. Selling expenses aren't capitalized because 1) the asset is complete and 2) they are assignable to the sale and not the cost of the asset. Other costs to acquire the asset, such as delivery fees, installation fees, insurance, etc. are capitalized.
Do you own the asset? If I hire a construction company to build a warehouse, they hae nothing to capitalize since they don't own the asset. I do.
And material. If I have you write a shell script that we'll use for the next five years to copy backups between our servers and Azure, and it takes an afternoon, we don't capitalize that. It's just not material.
If it's leased for 90/95% of the cost and for 90/95% of the useful life, it's capitalized. This prevents companies from treating capitalized costs as leasing expenses in the current period.