What is the Capitalization Limit?

The capitalization limit is the amount paid for an asset, above which an entity records it as a long-term asset. If an entity pays less than the capitalization limit for an asset, it charges the asset to expense in the period incurred. This limit is imposed in order to reduce the record keeping associated with long-term assets.

Example of the Capitalization Limit

Muldrow Corporation has a board-imposed capitalization limit of $2,500, where all expenditures on long-term assets of $2,500 or more must be capitalized. The company purchases a laptop computer for $1,900 and charges it to expense at once, since the laptop cost less than the capitalization limit. The company also purchases production machinery that cost $20,000; it capitalizes this amount, since it exceeds the capitalization limit and the machinery will be used for many years.