2.2.  Amortization of Capital Costs

A cost is an expenditure on something. If the cost is for something expected to provide a future benefit, an accountant will record it as an asset. When the asset is actually used or consumed, it will be recorded as an expense. The cost of inventory, for example, is an asset while it is sitting in a warehouse, but when the asset is sold or used in production, its cost converts to an expense.

Most costs are dispersed for current use, and they are recorded immediately as an expense. An expense whose benefit is expected to last one year or less is called a current expense. Expenses such as office salaries, utility bills, and rent fall into this category. Typically, these costs are paid in the same month the service is provided.

Other costs, such as the purchase of an automobile, provide services for a long period of time, and their benefit is only used up gradually. By recording them as an asset, these assets are said to be capitalized. The capitalized asset is gradually e