Difference between Depreciate and Capitalize

Difference between Depreciate and Capitalize

Sometimes a basic question might arise about the difference between Depreciation and Capitalization. The following is the difference between both:
Depreciate means slowly reducing the value of the asset in the balance sheet as they become obsolete with time and usage. The value is deducted from the value of the asset in the balance sheet and is also shown as depreciation expense in the income statement. For example, if a company buys a machine for $5000 with an estimated life of 10 years. If a company follows straight line method of depreciation, $500 would be deducted from the value of the machine every year in the balance sheet and will also appear as depreciation expense in the income statement.
Capitalization refers to summing up an amount in the balance sheet. For example, if the company is going to construct a building and has taken a loan for it, the interest paid for the loan will be added to the total value of the building in the balance sheet.
Therefore, the basic difference is that Depreciation means reducing the value of the asset over the asset’s life span and Capitalization means adding up an amount to the balance sheet.