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Definition

This refers to the  conversion of an expense from the income statement into an asset on the balance sheet. This is one of the "tricks" which private investors have to watch out for. For example, an IT company is employing a programmer to write some software for them which they intend to sell. That programmers salary is an expense in the books of account. But if the company regards that software as an asset of the business, they may decide to "capitalize" some or all of his salary as the cost of that asset. This has the effect of making the company look more profitable and of adding an intangible asset to its balance sheet. Both of these things make the company look better in its financials. So it is very important to establish what the company's intangible assets are and whether they should have been capitalized or more accurately expensed.

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