Moneyzine
Contents
/Personal Finance/Capitalized Cost

Capitalized Cost

Moneyzine Editor
Author: 
Moneyzine Editor
1 mins
September 25th, 2023
Advertiser Disclosure

Definition

The car leasing term that refers to the total amount of money to be financed over the term of the lease is capitalized cost. It's also an accounting term that describes the valuation used when calculating the depreciation on an asset.

Calculation

When used in the context of an automobile lease, the following formula applies:

Net Capitalized Costs = Capitalized Costs - Capitalized Cost Reduction

Explanation

In financial statements, the capitalized cost appears on the balance sheet as an asset. The depreciation of that asset flows to the income statement as a non-cash expense.

With a car lease, the capitalized costs include the negotiated price of the car plus any fees or taxes that will be financed. Capitalized cost reduction payments serve to reduce the monthly lease expenses by lowering the net capitalized costs as demonstrated by the above calculation.

The difference between net capitalized cost and the residual value of the automobile is used to calculate the monthly lease payments.

Example

The leasing company first calculates all of the costs of the car: the price of the car, licensing and lease initiation fees, taxes and interest. This is the capitalized cost. To make the monthly payments more affordable, the leaseholder may ask for a capitalized cost reduction payment. This is money upfront, such as a down payment. The payment is used to lower the capital, or money, the leasing company is lending the leaseholder.

Since the car has residual, or terminal, value at the end of the lease, the monthly payments need to cover the net capitalized costs minus the residual value.

Related Terms

Related Content

  • What Can Help You Meet Your Budget While Shopping for Important Items?
    Budgeting while ensuring you don't compromise on quality can seem daunting. Whether filling your pantry, updating your wardrobe, or keeping up with the latest tech, smart shopping strategies are crucial for keeping your finances in check.
    April 2nd, 2024
  • How to Make a Million Dollars in 10 Years
    Truthfully, this title should actually be “How to Make a Million Dollars in 10 Years Without Going Into Debt", but that is just getting a little too winded for my liking. It’s true though!
    March 26th, 2024
  • How to Apply Maslow’s Hierarchy to Your Money This Year
    You might vaguely remember your psychology teacher talking about Maslow. He pointed at a picture of a triangle as you nodded off in the back of the school room.
    March 27th, 2024
  • How to Tackle Multiple Savings Goals
    When there’s only so much money to go around, there are often multiple savings goals competing for your money. Think of the young professional who’d like to get a more reliable car, buy a house, and save for retirement. Or consider the young family that’s saving for college, retirement, and a bigger house.
    March 22nd, 2024
  • The Countdown to Early Retirement: 10 Expenses to Eliminate
    Dreaming of waving goodbye to the daily grind five years ahead of schedule? The road to early retirement is paved with more than good intentions; it requires a meticulously crafted strategy with surprising twists. It's not solely about what you should be doing—like diligently saving a portion of your income or investing wisely—but also about what you need to stop doing.
    March 22nd, 2024

Contributors

Moneyzine 2024. All Rights Reserved.