Capitalization and depreciation policy procedures

- What is a capitalization policy?
- What is a depreciation policy?
- How to create capitalization and depreciation policy templates
- How are capitalization and depreciation policies related?
- Criteria for capitalizing assets
- Items you can capitalize
- Depreciation procedures
- Ease your capitalization and depreciation with Ramp’s templates

Having a clear and defined capitalization and depreciation policy helps you keep your business financial reporting accurate and manage your assets effectively. The capitalization policy guides you in deciding which expenditures should be treated as capital assets.
On the other hand, the depreciation policy gives you a roadmap for spreading the costs of these capital assets over their useful lives. When you put these policies together, they help you comply with accounting standards and give you a transparent view of your financial health.
What is a capitalization policy?
A capitalization policy sets a minimum cost threshold, ensuring you view any expenditure above that as a long-term investment—or capital asset—that will depreciate over time. It helps you classify expenditures as fixed assets to depreciate, ensuring consistent financial reporting and clear separation between operational costs and long-term investments that bring value for multiple fiscal periods.
What is a depreciation policy?
You record depreciation regularly to show how an asset's value fades over time due to use, wear and tear, or becoming outdated. The depreciation policy shares an overview of the methods for calculating depreciation, the estimated useful life of assets, and how to apply depreciation. All this provides a clear and accurate picture of an asset's value throughout its lifetime.
How to create capitalization and depreciation policy templates
Creating clear capitalization and depreciation policy templates promotes consistent financial reporting and compliance. These templates help you record accurate asset values and manage long-term investments.
Steps to create a capitalization policy template
- State the policy’s goals, such as guiding financial reporting and ensuring compliance
- Set a minimum dollar amount for capitalizing assets, taking industry standards into account
- List the types of assets that can be capitalized; include specific examples
- Define the expected useful life for each asset category
- Spell out methods for recording capitalized assets, including allocation procedures
- Specify how often to review and update the policy
- Emphasize maintaining proper records to support capitalized expenditures
- Make sure all appropriate staff are trained and understand the policy
Steps to create a depreciation policy template
- Your accounting policy should spell out the objectives, focusing on accurate asset value allocation and compliance
- Identify the methods—straight-line, declining balance—and provide examples
- Outline the expected useful life for asset categories based on industry standards
- Provide guidelines for estimating the asset's expected value at the end of its useful life
- Detail how and when depreciation will be recorded in financial statements
- Outline procedures for assessing and recognizing asset impairment
- Define how and when to review useful lives and salvage values
- Stress the importance of documenting depreciation calculations and adjustments
- Ensure staff are trained on the depreciation policy for better compliance
How are capitalization and depreciation policies related?
Capitalization and depreciation policies are closely related because they both deal with how to treat long-term assets in accounting. Also, capitalization and depreciation policies both must comply with Generally Accepted Accounting Principles (GAAP), ensuring that financial reporting is standardized and consistent across industries.
How does capitalization affect depreciation?
Depreciation policy comes into play when an asset is capitalized because now, instead of expensing the entire cost at once, the business will spread the cost over the asset’s useful life. The useful life and capitalized amount directly affect the amount of depreciation recorded each period.
For example, if you capitalize a $50,000 machine, and the depreciation policy applies a 5-year useful life, your business will record a $10,000 depreciation expense each year using the straight-line method.
How does depreciation affect capitalized assets?
The depreciation policy reduces the book value of the capitalized asset on the balance sheet over time. As you apply depreciation, the value of the asset on the balance sheet decreases, and accumulated depreciation grows. Depreciation doesn't affect cash flow, but it does affect net income and the carrying value of capitalized assets, reflecting wear and tear or obsolescence.
For example, after the first year, the machine mentioned above will show a net book value of $40,000 on the balance sheet Original $50,000 Cost - $10,000 Accumulated Depreciation
Criteria for capitalizing assets
The following criteria for capitalizing assets are a set of guidelines for when an expense should be classified as a capital asset rather than a regular operating expense. Typical criteria include:
- The asset’s cost must exceed a minimum dollar amount, or capitalization threshold, set by the business. This threshold ensures that only significant expenditures are capitalized.
- You must expect the asset’s useful life to last more than one year. Expense the asset rather than capitalizing it if it’s consumed or fully used within the current fiscal year.
- The asset must provide economic benefits to the business beyond the current reporting period
- It must be tangible, meaning it has a physical form, like real estate, equipment, or machinery. You may also capitalize some intangible assets, such as computer software or intellectual property, depending on business policy.
- Include costs directly attributable to acquiring the asset in the capitalized amount. These include purchase price, installation or setup costs, shipping and handling fees, and any costs required to bring the asset into working condition, such as training or testing.
- The business must have legal ownership or control over the asset to capitalize it. You can also capitalize leasehold improvements if your business has the right to control and use the asset.
- You must intend to use the asset for business operations rather than for sale. Don’t capitalize assets held as inventory or for short-term resale.
Items you can capitalize
For accurate financial reporting and effective asset management, you must understand which expenditures you can capitalize. These items qualify:
| Asset type | Capitalization criteria | Land | Purchase cost of land, including legal fees, property taxes at purchase, and costs for preparing the land (e.g., demolition of existing structures). | Buildings and Structures | Cost of acquiring or constructing buildings for business use, including renovation, construction, and other building improvement costs. Capitalized costs include architectural fees, building permits, and interest costs during the construction period. | Machinery and Equipment | Purchase of machinery/equipment for business use, including manufacturing equipment and office machinery. Capitalize installation, delivery, and set-up costs along with the purchase price. | Vehicles | Business-related vehicles (e.g., delivery trucks, company cars, service vehicles). Capitalize purchase price, sales tax, registration, and any additional costs to make the vehicle ready for use. | Furniture and Fixtures | Office furniture, shelving, lighting fixtures, and other fixed installations. Capitalize costs if they meet capitalization threshold and provide long-term use. Include delivery and installation costs. | Leasehold Improvements | Improvements made to leased property, such as partitions, new flooring, or lighting. Capitalize and depreciate over the shorter of the useful life or lease term. | Intangible Assets | Patents, trademarks, copyrights, and purchased software licenses. Capitalize if they provide long-term benefits to the business. | Computer Hardware and Software | Hardware (e.g., computers, servers) and purchased or custom-developed software exceeding the capitalization threshold. Capitalize installation, setup, and testing costs. | Construction in Progress (CIP) | Costs related to construction of long-term assets still under construction. Once completed, reclassify costs into the appropriate asset categories (e.g., buildings or machinery). | Land Improvements | Improvements made to land that enhance usability, such as parking lots, landscaping, fences, or irrigation systems. Capitalize separately from the land and depreciate over the asset's useful life. | Office and Industrial Equipment | Equipment used in day-to-day office or industrial operations, such as HVAC systems, elevators, or safety equipment. | Capitalized Interest | Interest costs incurred during construction of long-term assets like buildings or large equipment, capitalized as part of the asset's cost. | Acquisition of Buildings by Purchase | Capitalize total acquisition cost, including purchase price, legal expenses, appraisal fees, title insurance, and renovation costs for building preparation. | Donations of Capital Assets | Assets received as donations, capitalized at their fair market value at the time of receipt. These assets should provide long-term benefits like purchased capital assets. | Group Purchases | When acquiring multiple items at once, capitalize them as a group if the combined cost exceeds the capitalization threshold, even if individual items fall below the threshold. | ||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Asset type | Capitalization criteria | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Land | Purchase cost of land, including legal fees, property taxes at purchase, and costs for preparing the land (e.g., demolition of existing structures). | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Buildings and Structures | Cost of acquiring or constructing buildings for business use, including renovation, construction, and other building improvement costs. Capitalized costs include architectural fees, building permits, and interest costs during the construction period. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Machinery and Equipment | Purchase of machinery/equipment for business use, including manufacturing equipment and office machinery. Capitalize installation, delivery, and set-up costs along with the purchase price. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Vehicles | Business-related vehicles (e.g., delivery trucks, company cars, service vehicles). Capitalize purchase price, sales tax, registration, and any additional costs to make the vehicle ready for use. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Furniture and Fixtures | Office furniture, shelving, lighting fixtures, and other fixed installations. Capitalize costs if they meet capitalization threshold and provide long-term use. Include delivery and installation costs. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Leasehold Improvements | Improvements made to leased property, such as partitions, new flooring, or lighting. Capitalize and depreciate over the shorter of the useful life or lease term. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Intangible Assets | Patents, trademarks, copyrights, and purchased software licenses. Capitalize if they provide long-term benefits to the business. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Computer Hardware and Software | Hardware (e.g., computers, servers) and purchased or custom-developed software exceeding the capitalization threshold. Capitalize installation, setup, and testing costs. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction in Progress (CIP) | Costs related to construction of long-term assets still under construction. Once completed, reclassify costs into the appropriate asset categories (e.g., buildings or machinery). | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Land Improvements | Improvements made to land that enhance usability, such as parking lots, landscaping, fences, or irrigation systems. Capitalize separately from the land and depreciate over the asset's useful life. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Office and Industrial Equipment | Equipment used in day-to-day office or industrial operations, such as HVAC systems, elevators, or safety equipment. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capitalized Interest | Interest costs incurred during construction of long-term assets like buildings or large equipment, capitalized as part of the asset's cost. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of Buildings by Purchase | Capitalize total acquisition cost, including purchase price, legal expenses, appraisal fees, title insurance, and renovation costs for building preparation. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Donations of Capital Assets | Assets received as donations, capitalized at their fair market value at the time of receipt. These assets should provide long-term benefits like purchased capital assets. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Group Purchases | When acquiring multiple items at once, capitalize them as a group if the combined cost exceeds the capitalization threshold, even if individual items fall below the threshold. |
Depreciation procedures
When you acquire it, classify the asset into the appropriate asset category, such as buildings, machinery, office equipment, or vehicles. Each asset class should have predefined depreciation rules and useful lives. Typical criteria for depreciation procedures include:
1. Estimate the asset’s useful life based on the manufacturer’s guidelines, industry standards, historical data from similar assets, and legal or contractual limits, if applicable
2. Select the appropriate depreciation method based on business policy and the nature of the asset. You must apply this method consistently across similar assets. Common methods include:
| Depreciation method | Description | Straight-line method | Spreads the cost evenly over the asset's useful life | Declining balance method | Depreciates more in the early years and less in later years | Units of production method | Depreciates based on usage rather than time; ideal for manufacturing equipment | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Depreciation method | Description | |||||||||||||||
Straight-line method | Spreads the cost evenly over the asset's useful life | |||||||||||||||
Declining balance method | Depreciates more in the early years and less in later years | |||||||||||||||
Units of production method | Depreciates based on usage rather than time; ideal for manufacturing equipment |
3. Estimate the salvage value of the asset, which is what, if anything, you expect the asset to be worth at the end of its useful life
4. Use the historical cost of the asset—purchase price and all related setup costs—to determine the depreciable amount, subtracting the salvage value.
5. Depreciation begins when you place the asset into service for its intended use, not when it’s purchased. Be sure to apply depreciation in the first accounting period after you start using it.
6. Record depreciation periodically—typically monthly or annually. Track the accumulated depreciation separately from the asset account on the balance sheet, reducing the asset’s carrying amount.
7. Regularly review the asset’s useful life and salvage value to confirm it’s reasonable, especially if the asset undergoes significant changes or if its economic utility declines. Adjust the depreciation schedule as needed based on your revised estimates.
Ease your capitalization and depreciation with Ramp’s templates
Clearly defining asset capitalization and depreciation procedures ensures compliance with accounting standards. Focusing on accuracy and transparency improves decision-making, asset management, and business outcomes performance.
To simplify and optimize your capitalization and depreciation policies even further, Ramp streamlines expense categorization. With seamless integration into your accounting software, you can effortlessly track and manage capital expenditures while maintaining compliance with accounting standards.
Learn how Ramp can help automate your asset management.

Don't miss these
“Our previous bill pay process probably took a good 10 hours per AP batch. Now it just takes a couple of minutes between getting an invoice entered, approved, and processed.”
Jason Hershey
VP of Finance and Accounting, Hospital Association of Oregon

“When looking for a procure-to-pay solution we wanted to make everyone’s life easier. We wanted a one-click type of solution, and that’s what we’ve achieved with Ramp.”
Mandy Mobley
Finance Invoice & Expense Coordinator, Crossings Community Church

“We no longer have to comb through expense records for the whole month — having everything in one spot has been really convenient. Ramp's made things more streamlined and easy for us to stay on top of. It's been a night and day difference.”
Fahem Islam
Accounting Associate, Snapdocs

“It's great to be able to park our operating cash in the Ramp Business Account where it earns an actual return and then also pay the bills from that account to maximize float.”
Mike Rizzo
Accounting Manager, MakeStickers

“The practice managers love Ramp, it allows them to keep some agency for paying practice expenses. They like that they can instantaneously attach receipts at the time of transaction, and that they can text back-and-forth with the automated system. We've gotten a lot of good feedback from users.”
Greg Finn
Director of FP&A, Align ENTA

“The reason I've been such a super fan of Ramp is the product velocity. Not only is it incredibly beneficial to the user, it’s also something that gives me confidence in your ability to continue to pull away from other products.”
Tyler Bliha
CEO, Abode

“Switching to Ramp for Bill Pay saved us not only time but also a significant amount of money. Our previous AP automation tool cost us around $40,000 per year, and it wasn’t even working properly. Ramp is far more functional, and we’re getting the benefits at a fraction of the cost.”
Frank Byers
Controller, The Second City
