Which item is typically capitalized?

• A. Factory equipment
• B. Salaries
• C. Advertising expense
• D. COGS (cost of goods sold)

Answer: (A)

Capitalizing costs means recording an asset on the balance sheet and spreading the expense over multiple periods, rather than expensing it all in one period. Items that will provide benefits for more than one year are typically capitalized.

Factory equipment is a long-term asset used in production over many periods, so it fits this rule and is recorded as an asset and depreciated over its useful life. This is why it’s the typical item to capitalize.

Salaries are a cost of labor for the current period and are expensed as incurred. Advertising expense is also recognized when the advertising activity occurs, so it’s expensed in the period. COGS represents the cost of goods that have been sold and is expensed in the period of the sale, not capitalized.