what is capitalized interest 
capitalized interest is the cost of borrowing to acquire or construct a long term asset unlike an interest expense incurred for any other purpose capitalized interest is not expensed immediately on the income statement of a company s financial statements instead firms capitalize it meaning the interest paid increases the cost basis of the related long term asset on the balance sheet capitalized interest shows up in installments on a company s income statement through periodic depreciation expense recorded on the associated long term asset over its useful life 1investopedia zoe hansenunderstanding capitalized interestcapitalized interest is part of the historical cost of acquiring assets that will benefit a company over many years because many companies finance the construction of long term assets with debt generally accepted accounting principles gaap allow firms to avoid expensing interest on such debt and include it on their balance sheets as part of the historical cost of long term assets 1typical examples of long term assets for which capitalizing interest is allowed include various production facilities real estate and ships capitalizing interest is not permitted for inventories that are manufactured repetitively in large quantities u s tax laws also allow the capitalization of interest which provides a tax deduction in future years through a periodic depreciation expense 2in accordance with the matching principle capitalizing interest ties the costs of a long term asset to the earnings generated by the same asset over its useful life 2capitalized interest vs expensed interestfrom the perspective of accrual accounting capitalizing interest helps tie the costs of using a long term asset to earnings generated by the asset in the same periods of use capitalized interest can only be booked if its impact on a company s financial statements is material otherwise interest capitalization is not required and it should be expensed immediately 