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Expenses and capitalization refer to expenditures that companies make in the course of doing business. In accounting expense matches the cost incurred to the period in which economic benefit is enjoyed. An expense is charged to the income statement and decreases owners' stake in the company's financial standing. Capitalization of expenditure is however required when the economic benefit extends over the long term usually in excess of one year. A capitalized expenditure usually applies to long-lived assets such as equipment and buildings and is recorded on the balance sheet.

To prevent the capitalization of very minor items that makes the financial statements cumbersome, companies set a minimum cost for items that are to be capitalized. For example, a company may set a policy that expenditures over $5,000 are capitalized and recognized as an asset on the balance sheet. When this happens, the asset is usually depreciated over its useful life. These results in a monthly depreciation expense charged to the income statement which is necessary to recognize the monthly "use" of the capitalized asset.

The basic distinction between an expense and a capitalized item is the term (or time which the economic benefit is enjoyed). An expense yields immediate benefit with no substantial value in the long term. An example here is office supplies that have benefit now but no substantial benefit in the long term. A capitalized item on the other hand, such as machine equipment or buildings has a benefit over the long term (up to over 30 years in some cases).

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