EMS Financial Literacy Practice Exam

Capital costs are investments in assets that provide benefits beyond one year. When you buy something that will be used in the business for a long time, you treat it as a fixed asset and allocate its cost over its useful life. A new company vehicle, a property purchase, and equipment for operations all meet this idea because they are expected to help generate value for years and are recorded on the balance sheet as assets.

Rent for office space, in contrast, is a period cost. It’s an ongoing expense that is used up in the current period and does not create a long-term asset, so it is expensed as incurred rather than capitalized. That’s why rent for office space is not considered a capital cost.