Case Study: Capitalizing Operating Expeneses

In: Business and Management

Submitted By limlimit
Words 769
Pages 4
Eric Lim
Certified Public Accountant
324 Saint Francis Blvd
Daly City, CA 94015

September 9, 2012

Grace Lau, President
ABC Venture Capital
345 King Street
San Francisco, CA 94101

Dear Ms. Lau,

It is my pleasure to be your consultant as I will try my best to explain the situation to you with proper accounting knowledge and rules. I will conduct my analysis in accordance with generally accepted auditing standards and I hope to bring you the best possible solution to your situation.

The facts as I understand them are as follow: Western wants to capitalize the entire amount of the consulting bill ($750,000), and Western also wants to capitalize the costs of staff salaries ($300,000) for the time they spent in meetings with MediaBlitz. Western intends to amortize the capitalized amounts over the expected product-life of the game.

Applicable Laws:
Please let me explain the difference between capitalization and expensing in business. Business expenses are divided into two categories, each of which is accounted for differently. Current expenses are those which keep a business running on a day-to-day basis. Current expenses are paid in the accounting period in which they are incurred. Capitalized expenses, however, relate to the purchase of capital assets or expenses related to the improvement of these assets. Capitalized expenses are not accounted for in the period in which they were purchased. These items are placed on the balance sheet as an asset and depreciated or amortized down in value on a monthly or yearly basis via a clearly defined depreciation method.
Capitalizing operating expenses is logical for companies in situations where they acquire new assets with a long-term lifespan can spread out the cost over a specified period of time. For example: a business may spend large amounts of money for a machine for its building.…...

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