When a business capitalizes a cost, it records it as an asset on its balance sheet instead of as an expense on its income statement. Capitalized costs provide a benefit to a company over multiple periods, while expenses provide value in only the current period. When your small business pays sales tax to acquire an asset, you must include the tax, along with certain other costs, as part of the total capitalized cost of the asset that you record in a journal entry. As you use the asset each period, its capitalized cost gets reduced through a process called depreciation.

Multiply the sales tax percentage by the purchase price of the asset to calculate the amount of the sales tax. For example, assume your small business buys new equipment with a $10,000 sales price and pays 9 percent in sales tax. Multiply 9 percent, or 0.09, by $10,000 to get $900 in sales tax.

Add the sales tax to the asset’s price. Add any other costs necessary to obtain the asset and prepare it for use to calculate the asset’s total capitalized cost. These necessary costs might include permit costs, freight charges, installation fees and testing costs. In this example, assume you paid $200 in freight costs and $200 in installation charges. Add $10,000, $900, $200 and $200 to get a total cost of $11,300.

Debit the asset’s total cost to the appropriate asset account in your accounting journal to capitalize the cost of the asset. A debit increases the asset account’s balance on your balance sheet. In this example, debit $11,300 to your equipment account.

Credit the same amount to the cash account in the same journal entry. A credit decreases the cash account, which is also an asset on your balance sheet. Concluding the example, credit $11,300 to the cash account.


Purchased assets sometimes require repair due to damage during shipping and installation. If you complete this work, debit the cost to the repair's expense account in the same journal entry in which you record the cost of the asset.