What exactly does it mean to capitalise certain costs and not expense them??
It means you take the asset/expense onto the balance sheet and expense them over a longer period. It’s similar to building and equipment. You don’t expense it all at once, rather an asset is set up, and a portion of that asset is expensed each year by depreciating them.
When you capitalize cost you increase your Liabilities and Assets on the BS. This allows you to not have to expense an item which would come directly out of NI. Therefore, by capitalizing the cost you initially have higher NI, Equity and Retained Earnings than you would if you expense the cost immediately. However, since you have increased Assets and Liabilities on the BS you will have a higher debt to equity Ratio and a lower interest coverage ratio. When you expense a cost you immediately write the cost off your earnings. By doing this you have lowered your NI initially which means your Equity and Retained Earnings are lower. However, since you will not have to depreciate the cost over time your NI will be higher in the following years. Keep in mind that you can only capitalize certain cost under IFRS and U.S. Gaap. And you will need to know the rules accordingly such as R&D, IE, and intangibles.
capitalize=asset yo yo