What is capitalization in the context of accounting?

In accounting, capitalization refers to the process of recording a cost as a long-term asset on the balance sheet rather than recognizing it as an expense on the income statement immediately. This practice allows a company to spread the cost of the asset over its useful life through depreciation or amortization, aligning the expense recognition with the revenue generated from the asset over time.

By capitalizing certain costs, businesses can delay their impact on profitability, which can provide a clearer view of financial performance and a better match between revenues and expenses. This approach is essential for large purchases or investments that will benefit the company for several years, such as property, plant, and equipment.

In contrast, recognizing all expenses immediately or only recognizing revenue upon cash receipt does not capture the long-term benefits associated with certain expenditures. Additionally, the practice of capitalization is relevant to both tangible and intangible assets, so it is not exclusively used for tangible assets. Therefore, the option that correctly defines capitalization in accounting as recording expenses as long-term assets to delay recognition is indeed appropriate.