Capitalization

What Is Capitalization?

Capitalization is an accounting method in which a cost is included in the value of an asset and expensed over the asset’s useful life rather than being expensed in the period in which the cost was spent.

Deeper Definition

Capitalization is an accounting rule that allows a cash outlay to be recorded as an asset on the balance sheet rather than an expense on the income statement. It is a quantitative examination of a company’s capital structure in finance. The cost of capital in a corporation’s stock, long-term debt, and retained earnings is referred to here.

Market capitalization is also defined as the number of outstanding shares multiplied by the share price. It measures a company’s overall market worth.

Capitalization Example

There are two critical types of capitalizations, one of which is applied in accounting and the other in finance.

1. Accounting

The matching principle in accounting requires businesses to report costs in the same accounting period in which the relevant income is earned. Office supplies, for example, are often expensed in the period in which they are incurred since they are expected to be utilized within a short period. Capitalization is an accounting principle that allows a cash outlay to be recorded as an asset on the balance sheet. This is opposed to being recorded as an expense on the income statement. The cost of fixed assets, such as computers, automobiles, and office buildings, is recorded on the general ledger as the asset’s historical cost. It is not expensed in full against earnings in the current accounting period. These expenses are said to be capitalized rather than expensed.

2. Finance

Another component of capitalization is the capital structure of the firm. The book value cost of capital, which is the total of a company’s long-term debt, stock, and retained earnings, is capitalization. The market value is an alternative to the book value. Capitalization is a quantitative examination of a company’s capital structure in finance. It can also refer to a company’s book value cost of capital. This is the total of its long-term debt, equity, and retained earnings. The market value or market capitalization is an alternative to the book value.