Balance Sheet effect of Capitalizing a Cost (how does it really balance out?)

CFA Level I FRA
#1

Question regarding the Balance Sheet effect of Capitalizing a Cost (expenditure)

So when you capitalize a cost (you purchase Asset for $1000, and you decide to capitalize it) what exactly would be the balance sheet treatment?

First, you would increase the Assets side by $1000 right? According to the explanations, it seems Liabilities are unaffected, and Equities are increased.

Why would Equities be increased by $1000? What part would it be and how? Would it be net income?

Wouldn’t the more appropriate “balance” be to decrease Assets (cash by 1000)? Yes it would be a cash outflow from investing, but it would still be a cash outflow and thus a decrease in Cash? Would this mean the Equities and Liabilities would remain unaffected? Thanks

#2

When you capitalize a cost you paid cash for, Assets remain unchanged. You increase one component of assets (for example intangible assets) and you decrease other (cash).

Alternatively, you could increase assets (intangible assets) and increase liabilities (accounts payable) if the settlement of the payment is in the future. It will always balance out, just depends how you paid for it.

It would only affect Equity, through retained earnings, if you expense it.

In the cash flow statement it will appear as a cash outflow from investing activities.

#3

+1 what smarter said. To explicitly answer your “why would equity be increased by $1000?”. It only would in comparison to expensing.