What is capitalization? Definition and meaning

Capitalization is the provision of capital for a business, or the conversion of assets or income into capital. In finance, it is a quantitative assessment of a company’s capital structure. It also has a non-business meaning – writing or printing in capital letters or with each word starting with a capital letter.

In accounting, capitalization is when a cost is recorded as an asset rather than an expense. If the cost is not expected to be completely consumed within the current period but over an extended period, it is possible to use this approach, accountants say.

For example, coffee for the staff room is expected to be entirely consumed soon – in the near future – so it is charged to expense at once. However, a new truck is recorded as a fixed asset and charged to expense over a much more extended period through depreciation, given that the vehicle will be entirely consumed over a considerably longer time than staff-room drinks.

CapitalizationCapitalization occurs when the company buys the trucks but not the bags of coffee. The trucks are not expected to be entirely consumed within the current accounting period, but the coffee bags will. The trucks can be recorded as an asset at once, while the coffee bags are recorded as an expense.

Capitalization limit

If a cost is very small it is charged to expense immediately, all in one go. There is no point in bothering with a series of calculations and journal entries to capitalize it and then over time gradually charge it to expense.

The actual amount below which an item is automatically charged to expense is called the capitalization limit or cap limit.

The capitalization limit is used to keep record-keeping down to a practical and manageable level, while at the same time capitalizing the items that should be classed as fixed assets.

Market Capitalization

Market capitalization, also called market cap, is the value of all the shares that a publicly-listed company issues.

Market capitalization top four corporationsApple Inc. is by far the largest company globally by market capitalization. Among the top four, three are tech companies.

Market capitalization is calculated by multiplying the total number of shares outstanding by the price of each individual share. ‘Shares outstanding’ refers to all the shares (financial assets) of a business that have been authorized, issued or purchased by investors and are held by them.

It is one of several factors when determining stock valuation, as well as investors’ perception of how much a corporation is worth. It is not a factor used when calculating total asset figures or net sales.

Market capitalization is a pointer regarding the returns and risk for a particular company’s stock. It is commonly used by investors as a tool that helps them select stocks that can meet their levels of risk and diversification goals.

According to dictionary.com, capitalization is:

“1. The act or process of capitalizing. 2. The authorized or outstanding stocks and bonds of a corporation.
3. Accounting – the total investment of the owner or owners in a business enterprise – the total corporate liability – the total arrived at after addition of liabilities. 4.Conversion into stocks or bonds. 5. The act of computing the present value of future periodical payments.

Video – Expense versus Capitalization

In this video, Alex Guerreros explains what the difference is between an expense a capitalization.