Capitalization and Depreciation Explained

Wallmine link: wallmine.com/users/sign-up?r=...
CLARIFICATION: while R&D can be capitalized under IFRS (international accounting system), most R&D expenses cannot be capitalized under U.S. GAAP (the accounting system used by American companies).
Capitalization and depreciation can be confusing topics, but they are worth understanding, as they can materially impact the numbers you see on the income statement. Today we’ll go over the topics and what you can do to circumvent the impact of lax assumptions on profit numbers.
Intro/Outro Music: www.bensound.com/royalty-free...
DISCLAIMER:
This channel is for education purposes only and is not affiliated with any financial institution. Richard Coffin is not registered to provide investment advice and as such does not provide recommendations on The Plain Bagel - those looking for investment advice should seek out a registered professional. Richard is not responsible for investment actions taken by viewers.

[@ThePlainBagel]

Happy Friday! Do you have any tips for handling capitalization and depreciation? Let me know in the comments below!

[@jijov.j1545]

Hi sir ,I have a question.Apple Stoke market share price is going down ,after apple published IPO(around 1975) they got the money.Then why are they concern about Stoke market share price even if they (company)are not making money from it share.?

[@RicardoVladimirWong]

A doubt!, If capital and liability are kinda different, then why are debentures a source of fixed capital, when they are liability

[@ThePlainBagel]

I’m not sure I fully understand the question, but I’ll take a stab at it. Capitalization is not the same as capital. They are related, because capitalization turns something into capital, but you can raise capital without the process of capitalization. When a company raises debt, they are not capitalizing an expense (though interest on a project may be capitalized). The reason you see liabilities go up with capital is because the balance sheet requires that both assets and liabilities (or equity) increase/decrease by the same amount. Raising debt increases assets and liabilities by the same amount.

[@RicardoVladimirWong]

@@ThePlainBagel thank you. I have my financial management exam tomorrow and so I popped my doubt on you. Sorry the question wasn't very relevant to the topic. Thanks again

[@ThePlainBagel]

Not a problem!

[@RoadToRetire25]

Damn I watch your vids to get away from my accounting work 😂. Fixed asset accounting is my least favorite section to work on at my job. You did a good job explaining a weird topic 👍

[@riceandpotatoes]

Oooooo accounting!! "accountant here, goes and grabs some popcorn"

[@zubochonk9205]

Thje more I watch your channel, the more I learn and realize how hard it is to pick stocks. Glad I chose to be a passive investor.

[@aeon20013000]

This was a great introduction into a confusing concept. Thanks a lot!

[@jim8072]

Excellent! Concise, clear and engaging! Better than many of my accounting professors!

[@prashunpcchakraborty70]

If only I had this video in school back in the day, I spent hours, days, weeks to grasp these concepts.

[@kimdejot]

Wow, you are amazing! These concepts were so confusing to me after reading so many differerent pieces online. You made it all super clear here! Thank ou!

[@HowMoneyWorks]

Great video. I would say it's important to include that if you sell a fully depreciated asset for anything greater than $0, the depreciation must be "recaptured" in the income statement. Also, make a video of the millions of ways to say "EBITDA" (joking, but this is the first time I've heard it said the way you said it)

[@sumnerrogers5091]

Depreciation is recaptured in their taxes (section 1245). The gain is recognized based on how much the selling price > book value normally in the income statement just like any other gain

[@HowMoneyWorks]

Sumner Rogers spot on! Great reply

[@andresj.s.3568]

I got so used to the way you make it all so easy to understand and entertaining that I find hard to watch any videos from any other creator. Keep the amazing work :D

[@cal9417]

I watch this having no experience or intention in going to anything involving major business finance, and yet I am here because the content is just that good.

[@danbochman]

Wow you have a real talent for clear and concise explanations! Keep up the good work!

[@tiffanybloke9076]

This video should have millions of views. This was the best explanation of capitalization. What really helped was showing how it appears on the income statement. You are the only one that did that! Thanks!

[@alexsmith8956]

This channel is so underrated. Great info!

[@Dr.Unsteady]

This was supper beneficial to me as a student with a teacher who’s just reading definitions for lectures and no explanation or reasoning for anything. These help a lot for us that aren’t extremely high iq and no prior business experience. Thank you very much

[@frediamaya5833]

Thanks to you, I understand better how companies work. Keep it up the awesome work.

[@JamesSmith-nq8ns]

Mate, this is extremely articulate and concise. Well done!

[@jayhay1237]

Great job. My wife and I are starting a new business and were discussing some of these topics days ago. You did good work in clarifying some very important accounting considerations.

[@KnakuanaRka]

How are your business ventures going?

[@ponzianomanning3071]

Great explanation of these complicated topics in such a short time! excellent teaching skills! Thanks.

[@conventionalischeating]

You have amazing content i started watching every single video on your channel and I've got to say this one is the best. You cramped so much info in such a short video!

[@brianjames9832]

I have my masters in taxation and you explained this better than any professor I ever had.

[@sunilkumar-yx7ht]

Keep those videos coming at regular basis. Very informative and fluid explanation. 👌👌👌

[@MrMineHeads.]

There are different ways that assets can depreciate. Straight line depreciation is just one way things can depreciate. There is also double declining, units of production, and sum of the years. They all have their own uses, but it is interesting to note the ways depreciation is used in accounting.

[@abrahammanzo2455]

I was aware of Depreciation of fixed and Amortization of Intangible assets but not capitalization. Thank you for your effort and the value you provide! You explained capitalization clearly as buss expense spread forward and provided a good example that helped me visualize it. Also, like your example of using EBITDA & the cashflow stat as a better guide to profits.

[@ramiromendozamedina4104]

I love you man, you make me fall in love with finance and with my career. Cheers from Colombia .

[@Kevin_Street]

Thanks for another really interesting video!

[@nicketsirvoicar2301]

Your videos are Awesome! Keep up the good work. 👌🏼👏🏼

[@Eddy-zq3ot]

Got a new understanding about EBITA, thanks, really helpful.

[@campeur33]

you should do cfa prep video. very good video

[@user-yc6dc3yg1c]

Very well explained. Not only telling about the subject, you elaborated related info. Keep it up continue to do the same you benefit your fans and more will support your channel.

[@ekananda9591]

Thank you so much for making this video

[@sandyyap5279]

You made accounting sounds interesting. Awesome job! Keep the videos coming!

[@ahmedxh]

Man your explanation is just clear. Do you have any videos on DCF valuation?

[@amirulneezam5712]

Very clear explaination.. You did a great job there

[@ninasekiguchi358]

Extremely helpful video! Thank you so very much!

[@firstlast3507]

I really like this channel. This channel is in my top ten KZbin channels.

[@ThePlainBagel]

I'm honoured!

[@marykcoughlin3627]

That was very informative - great details.

[@PetVlogMaker]

Great explanation of depreciation and capitalization.

[@OfficialDotaPlayer]

one of your best videos

[@caleb8075]

appreciate the helpful examples! thanks!

[@sulaiman3520]

Thank you so much

[@Jayden-qq1ei]

Awesome teaching style!

[@luvpinas123]

Accounting treatment: Capitalisation: DR Capitalised costs, CR Assets decreased or liabilities increased ti incur those costs. When capitalised costs get amortised, DR Amortisation expense, CR Accumulated amortisation. Well the example you used was a bit different but when I wrote this comment I thought this video was on capitalisation of costs as intangible assets lol.

[@deddywirata3719]

Thanks! This is very clearly explained. 👍

[@raajarajeshvari1486]

Woww man!! You explained it amazingly.

[@LearnWithMike]

Fantastic explanation with examples good work

[@destroyeralphawinner]

This feels like my accounting classes

[@percky959]

I just love your Videos keep going

[@emrekoraygencsoy24]

Thanks a lot. I believe, London bullion market association and how it works is a good topic to work on.

[@joycecuaycong]

A great explanation!!

[@zibeddy]

Best example I've seen

[@duketrain8247]

Thank you sir!

[@pongop]

Very helpful!

[@arturomarquez6898]

Thank you!

[@WingusJones]

Wallmine is awesome thanks : D

[@wtfisthis451]

that 10 minutes went by so fast, was so engage in the video. was waiting for more information.

[@Mixedlove91]

Great video! Please keep them coming. Can you cover topics related to tax-reporting for US persons who have an interest in CFCs? Like 5471s, 8858s and 8865s?

[@aishwaryapotdar1348]

Thank you.

[@maddog5458]

Another great video. And I can understand it. :-)

[@Ryan-ey9xi]

Worth watching this 👍

[@scottferguson5078]

Super smart dude Richard is

[@flowerofash4439]

the key is transparency. i think showing depreciation expenses in income statement without descriptions and proper amount of details like initial value and predicted life span is such a red flag for investors

[@zszsdzxkjvnzkjlnvlzkjcnj]

Very good keep it up

[@vexrav]

Another great video! I am still not sold on the concepts of capitalization and Depreciation. 1. Strait-Line-Depreciation seems like a poor estimate in most cases. Consider for example a car, the vast majority of the depreciation occurs within the first months of ownership. 2. Many sizable assets likely have costs associated with selling. If for example a large piece of equipment is sold, but the land it is sitting on is not sold, then there would be a cost due to relocation. Not to mention that lots of equipment fits into a niche market making the asset very non-liquid. 3. It simply doesn't seem like it is the job of a company to interpret its costs for an investor. In fact this practice to me seems like it encourages fraud. If every other company is gaining an advantage by slightly massaging its numbers then the only way to remain competitive is to try to massage the numbers as much as possible without getting caught. If every company simply reported its income at face value, investors would be able to see a much more consistent picture of the health of any given company.

[@ThePlainBagel]

Certainly many people agree with those points! There are methods of depreciation that recognize expenses faster at the beginning (more like a car) but even those models are limited

[@me-myself-i787]

You can get "income at face value" through the cash flow statement. Look at the figure "net change in cash".

[@eroe511]

Idea, what is the effect of "free stocks" from brokerage apps such as webull, robinhood, and firstrade, on the stock market?

[@bassman9261995]

I’m trying to do some personal accounting and have been having trouble with figuring out how to count 401k, REIT contributions, RSU (significant portion of my income), education costs, and Acorns roundups for this exact reason.

[@candyyoda7842]

Good presentation👍! Can you please explain section 263A on the income statement? Thank you so much!

[@26chancelor]

Thank you .... Can you explain how to capitalize R&D costs of long duration (up to 5 years) in the first year of production? and its impact on the profit of that year (the year of production?) thank you

[@gangadutta308]

though this is explained in Security Analysis by Benjamin Graham, but I understood it from your video.

[@TimesScorpion7]

This is just basic accrual accounting? Expense recognition Principle? Expenses recognized as they are incurred to generate revenue?

[@scottferguson5078]

BTW, I like lemonade. Good job on explaining

[@jayw5544]

i need plain bagel merch

[@andrew5407]

I don't want to like this video because KZbin will screw me over in my recommendations.... but its worth the like

[@j.aimonis]

Awesome explanation, thanks so much. New Subscriber. Can you do a video on Accounts Receivables and Notes Receivables. The journals and adjusting entries for those and just understanding them.

[@divyaakashdutta4038]

Can you make a video on all the different ways businesses can manipulate their accounts without breaking any laws?

[@logocentric9183]

Maybe make a video outlining out how capitalization played a role in Enron. When you started talking about it I started getting flashbacks lol

[@grassetti4beauty272]

Can you advice any good books to learn how to choose stocks looking at earning reports and fundamentals of the company?

[@akshaylahoti3947]

Can you make a video on Capitalization and Expensing?

[@KnakuanaRka]

👌

[@amitmo734]

Hi Plain Bagel, I have a question. It was shown at time stamp 3:34 that a transfer of cash that went into the purchase of lemon squeezer machine not having impact on the Equity balance on the Balance Sheet. But on CFA text book (under capitalising vs expensing costs topic) I am seeing a statement that when you capitalise some cost and put it as asset on Balance sheet then the Equity balance would increase because of increase in Total Assets. I certainly know that I am having a knowledge gap here. Could you please explain me on this part as I know that I am missing on something here.

[@larryrichards9418]

could you do a video discussing cash flow? Thanks.

[@ThePlainBagel]

I already have one on that topic :) kzbin.info/www/bejne/npbJcnuNq9d5erM

[@traviscain2433]

This was a wonderfully helpful video. Jesus loves you!

[@samiabdullah5437]

I am taking a course in intermediate accounting and chapter one is capitalization of assets. The exam questions are of the CPA level and frankly difficult. Do you have some advice where can find questions and answers of this level. Thank you

[@richardjefferson2445]

👍

[@sarahscheuer4525]

USGAAP differs from IFRS as R&D costs must be expensed in the period incurred, not capitalized, since the future benefits are somewhat unknown...

[@ThePlainBagel]

I believe software R&D can be capitalized, though the example provided would not be capitalized under GAAP so great point, I’ll add a card to the video to clarify this

[@markgaterbondifinancialguy3885]

You usually cannot capitalise internally generated capital items. City

[@deitykush]

What is the best way to learn all of this stuff. Should I go get an MBA or should I learn corporate law by going to law school. Or are their individual courses or specialized books and reading material. Do tell.

[@ThePlainBagel]

Accounting stuff is probably best learned through a program like the CPA, although I think that requires an undergraduate degree, and you can only receive the designation if you actually work in accounting. The CFA also covers accounting in detail, and of course finance or accounting university programs would touch on the topics. Hope this helps!

[@aminafied678]

Thank you for the video. I'm struggling with understanding depreciation though. Is it only useful for tax purposes, or does the company actually benefit from it? Like, if you've already paid for the lemon squeezer for example in full, why would you wanna spread its value throughout the years again?? Is that to make sure u're able to afford a new one afterwards? Or is that just you putting the money back into your bank account to make up for the initial amount spent when buying it? help.

[@ThePlainBagel]

It’s sort of for “investor perception” purposes. A company that buys a lot of equipment would see a very large drop in profits if they had to expense everything. Depreciation smooths out the cost over time to reflect that while yes the expense is up front, the benefit that the cost paid for is realized overtime. Hop that helps!

[@aminafied678]

@@ThePlainBagel Makes way more sense! THANK YOU!

[@Mcparoridiesrecords]

Never thought the lemonade business was so competitive

[@renatacunha5308]

OMG, first video of yours I see and you are so cute!!

[@ziksy6460]

I feel like I've seen depreciation in the Operating Cashflow section. Can somebody explain why?

[@jean-francoisgagnon8209]

The operating cash flows are often presented as net earnings +/- adjustments. Depreciation is not a cash expense, so it must be removed from net earnings to get operating cash flows. Removing an expense is a double negative, which is why it is added to net earnings.

[@H.H.H-wp7ue]

finally i found my channel :D

[@ArshNov5]

You used straight line depreciation and why not written down depreciation method ?

[@ThePlainBagel]

I didn’t want to dive into the different methods of depreciation since that could be a whole video itself, I just stuck with the simpler method

[@paulhan7770]

Are you a CPA? you really know your stuff

[@ThePlainBagel]

No but I do have my CFA! It covers accounts but not to the same extent as the CPA

[@subscribetomyyoutubechanne1543]

I am 1k liker

[@Steven-wq8tx]

Nortel has entered the chat

[@torontoBluejays87]

Why…WHY didn’t we learn this in school, let alone basic investing concepts…😭😭😭

[@whyuurmdhaan3947]

Huhh

[@AwesumBear]

lemons? this used to be a bagel channel 😡

[@frostmelody]

Why my uni lecturer couldn’t just explain it like this

[@user-wi3yx3gy2o]

Maybe I could pay my bills by buying worthless non-marketable derivatives from my vendors at inflated prices. Then I wouldn’t need to recognize the expense.