When do I capitalize instead of expense?

Under the de minimis safe harbor many companies expense items under $2,500 per invoice or item for tax, and adopt a matching book policy. Above the threshold, an asset with a useful life of more than a year is capitalized.

What goes into the cost of an asset?

Everything needed to get the asset ready for use: the price, sales tax, freight, installation and testing. Training and maintenance contracts are expensed.

Journal entry for an equipment purchase

When equipment is bought, debit the fixed asset account for its full cost — price plus delivery and installation — and credit Cash or Accounts payable. Nothing is expensed on the day of purchase; the cost reaches the P&L as depreciation.

Price: $36,000
Delivery and installation: $1,200
Monthly depreciation: $1,033.33
Entity: Illustrative company
Basis: Accrual
Currency: USD
Period: February 2026

The worked example

A company buys server hardware for $36,000 and pays $1,200 for delivery and installation, all on a supplier's invoice. It goes into service on February 1, 2026 with a three-year life, so it depreciates by $1,033.33 a month.

Transaction · February 1, 2026

JE-11 Feb 2026Manualposted

Receive and install the servers; enter the supplier's invoice.

Journal entry JE-1, 3 lines
Account	Debit	Credit
1500 Equipment	36,000 US Dollar
1500 Equipment	1,200 US Dollar
2000 Accounts payable		37,200 US Dollar

Totals	37,200 US Dollar	37,200 US Dollar

Balanced.

What the entries do to the accounts

Every entry above posted to the ledger, starting from zero balances: the net debit or credit each account is left with. Debits equal credits, so the books still balance.

Net movement by account
Account	Debit	Credit
1500 Equipment	37,200 US Dollar
2000 Accounts payable		37,200 US Dollar

Totals	37,200 US Dollar	37,200 US Dollar

Why it is booked this way

Equipment that will be used for years is an asset, not a cost of the month it arrived. Capitalizing it puts the full cost on the balance sheet, and depreciation spreads it across the years it serves.

Costs to get the asset working are part of what it cost. Leaving them in expense understates the asset and overstates the month.

Common mistakes

Expensing a $30,000 server rack as office supplies.
Leaving shipping and installation in expense instead of the asset's cost.

Questions

When do I capitalize instead of expense?: Under the de minimis safe harbor many companies expense items under $2,500 per invoice or item for tax, and adopt a matching book policy. Above the threshold, an asset with a useful life of more than a year is capitalized.
What goes into the cost of an asset?: Everything needed to get the asset ready for use: the price, sales tax, freight, installation and testing. Training and maintenance contracts are expensed.

Terms on this page

Work with this entry

The tool that computes the schedule, the concept behind it, the entries that come next and the components that render them.

An illustrative company, not anyone’s real books. Every figure on this page is computed from the inputs in the example and posted by the same functions as the journal entry balancer. General information for US companies under US GAAP, not accounting or tax advice.