SAP Business One Certification Practice Exam

What is the purpose of Capitalization in asset management?

1. To reduce the asset's value

2. To record the asset's initial cost

3. To calculate tax deductions

4. To prepare assets for retirement

The correct answer is: To record the asset's initial cost

The primary purpose of capitalization in asset management is to record the asset's initial cost. When a business acquires a long-term asset, such as machinery, equipment, or buildings, the cost associated with that asset is capitalized. This means that instead of being expensed immediately in the income statement, the cost is recorded on the balance sheet as an asset. This process allows the cost of the asset to be depreciated over its useful life, which aligns the expense recognition with the revenue generated from using the asset. Capitalization is essential as it reflects the true value of the company's assets on the balance sheet, thereby providing clear financial reporting and better insight into the company's financial position. Other options, while related to financial management, do not represent the correct purpose of capitalization. Reducing the asset's value relates to impairment and does not pertain to initial cost recording. Calculating tax deductions generally involves depreciation, which follows capitalization, and preparing assets for retirement focuses on the asset's end-of-life process rather than its initial recording.