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

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
What’s Your One Page Financial Plan? Mapping out Your Future
“What’s your one page financial plan?” — This is the absolute best question that I’ve heard asked in a long time. Instead of talking about your hot stock pick or your fancy investment that shields you from paying taxes, I think it’s time for all of us to step back and ask ourselves the most intelligent question of all, “Why the heck do I care about money anyway??”
March 14th, 2024

Contributors

Moneyzine 2024. All Rights Reserved.