When to capitalize interest cost — AccountingTools.
Capitalized interest is the cost of the funds used to finance the construction of a long-term asset that an entity constructs for itself. The capitalization of interest is required under the accrual basis of accounting, and results in an increase in the total amount of fixed assets appearing on the balance sheet.Interest is capitalized in order to obtain a more complete picture of the total acquisition cost associated with an asset, since an entity may incur a significant interest expense during the acquisition and start-up phases of an asset.In this modern world an builders faces lots of challenges in the construction of a house or buildings to compete the world in the form that how to make a modern house or building which is environment friendly, energy saving and low cost etc, such sort of problems putting pressure on builders now a days.
If the company borrows money to pay for costs related to constructing the asset, GAAP states that actual interest expense incurred during construction is capitalized — that is, added to the basis of the asset instead of used as an expense on the income statement.With student loans, you can capitalize the interest costs in several ways. Instead of paying the interest as it comes due, you can let costs build up. Because the interest charges go unpaid, the charges get added to your loan balance. As a result, the loan balance increases over time, and you end up with a larger loan amount at graduation.
Interest capitalization refers to the accounting technique of adding interest incurred during the time it takes to acquire a long-term asset to the cost basis of the asset. Capitalized interest examples include building new production plants, real estate projects and student loan financing.
