when booked capitalized interest has no immediate effect on a company s income statement and instead it appears on the income statement in subsequent periods through depreciation expense the entry to record capitalized interest is a debit to the capitalized asset account and credit to cash assuming the interest is paid otherwise the credit is to the open liability until interest is paid 
in the long term both capitalized interest and expensed interest will have the same impact on a company s financial statements it is important for a company to realize that short term cash obligation may also be the same if interest is due immediately there will be the same cash outlay regardless of how interest is recorded the only difference between capitalized interest and expensed interest is the timing in which the expense shows up on the income statement 3capitalized interest vs accrued interestaccrued interest is the amount of interest that has accumulated on a loan since the last payment was made for example if a borrower has a monthly payment on a loan and they miss a payment interest will continue to accrue on the loan until the borrower makes their next payment the interest that is due but has not yet been paid during that time is referred to as accrued interest in some cases accrued interest and capitalized interest can be the same for example if an unpaid amount of interest is added to the balance of the principal the amount of accrued interest is considered the same as the amount of capitalized interest however the specific treatment of accrued interest does not always prevail itself to being capitalized for example a missed payment of interest could simply be a period expense that is immediately recognized on the income statement in this case the accrued interest that is due is not capitalized interest but instead set to be expensed immediately 4interest is to be capitalized for assets being constructed asset intended for sale or lease as discrete projects or investments accounted for by the equity method while specific investee activities occur 2capitalized interest and student loanscapitalized interest is also present in many student loans capitalized interest on student loans is the interest that accrues on a loan and is added to the principal balance of the loan this can happen when the borrower is not making payments on the loan and interest continues to accrue as is the case most often while the student is attending scholl in the case of student loans the borrower may be in any sort of deferment period however interest can still accrue on the loan during that time in some cases this interest is then added to the principal balance of the loan and the borrower is then responsible for paying interest on the higher principal balance i e interest on interest it s important to note that not all student loans accrue interest during a deferment period and some loans may have interest subsidies that cover the interest during that time however student borrowers must understand the implications of capitalized interest and respect the importance of how capitalized interest can affect their loan balance and repayment plan 4example of capitalized interestconsider a company that builds a small production facility worth 5 million with a useful life of 20 years it borrows the amount to finance this project at an interest rate of 10 the project will take a year to complete to put the building to its intended use and the company is allowed to capitalize its annual interest expense on this project which amounts to 500 000 the company capitalizes interest by recording a debit entry of 500 000 to a fixed asset account and an offsetting credit entry to cash at the end of construction the company s production facility has a book value of 5 5 million consisting of 5 million in construction costs and 500 000 in capitalized interest in the next year when the production facility is used the company books a straight line depreciation expense of 275 000 5 5 million of the facility s book value divided by 20 years of useful life of which 25 000 500 000 of capitalized interest divided by 20 years is attributable to the capitalized interest 