Definition of Capitalized interest:
Capitalized interest is the cost of borrowing to acquire or construct a long-term asset. Unlike an interest expense incurred for any other purpose, capitalized interest is not expensed immediately on the income statement of a company's financial statements. Instead, firms capitalize it, meaning the interest paid increases the cost basis of the related long-term asset on the balance sheet. Capitalized interest shows up in installments on a company's income statement through periodic depreciation expense recorded on the associated long-term asset over its useful life.
Capitalized interest is part of the historical cost of acquiring assets that will benefit a company over many years. Because many companies finance the construction of long-term assets with debt, Generally Accepted Accounting Principles (GAAP) allow firms to avoid expensing interest on such debt and include it on their balance sheets as part of the historical cost of long-term assets.
Interest that incurs during the self-construction of an asset that is considered to part of the assets cost.
How to use Capitalized interest in a sentence?
- Unlike typical interest expenses, capitalized interest is not expensed immediately on a company's income statement.
- Because many companies finance long-term assets with debt, companies are allowed to expense the assets over the long-term.
- Capitalized interest is the cost of borrowing to acquire or construct a long-term asset.
- By capitalizing the interest expense, companies are able to generate revenue from the asset in order to pay for it over time.
Meaning of Capitalized interest & Capitalized interest Definition