Canadian Securities Course (CSC) Practice Exam

Which statement best describes the concept of capitalization?

1. Expensing an asset in one accounting period

2. Recording an expenditure as an expense in one period

3. Recording an expenditure as an asset over multiple periods

4. Converting assets to liabilities

The correct answer is: Recording an expenditure as an asset over multiple periods

Capitalization refers to the process of recording an expenditure as an asset over multiple periods instead of expensing it in one accounting period. This allows for the cost of the asset to be allocated and recognized over its useful life, rather than all at once. Option A is incorrect because it refers to expensing, not capitalization. Option B is incorrect because it is the definition of expensing, not capitalization. Option D is incorrect because it refers to the conversion of one type of asset to another, not the recording of an expenditure as an asset.