Capitalized interest treats the cost of borrowing to buy an asset as part of total value of the asset. This allows one to depreciate interest on financial statements where the asset is listed because one counts the interest as part of total cost. Capitalizing interest gives one a truer picture of actual expenses on a project and allows one to budget accurately while saving on one's taxes.
Calculate the total amount of interest you will pay during the life of the asset. This simply consists of the sum of all interest payments you will make. The total interest should be added to the purchase price of the asset.Step 2
List the price of the asset, with interest, on your balance sheet. The asset is a liability, and together with the interest paid, will reduce the amount of net income you show on the balance sheet. Showing interest as part of the value of the asset reduces the amount of income tax you pay by a much greater amount than the purchase price alone would.
Depreciate the asset with the interest costs added. Because you treat this capital asset as a cost-plus-interest expense, you can depreciate a much greater amount than you would on the asset alone. This will save your company money on taxes.
Use a weighted average. If you purchase an asset in the middle of the year, only capitalize the interest for the part of the year you own the asset. For example, an asset purchased in July would only incur interest payments for half of the year.
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