Next video:
Loading the player...

Capitalization has different meanings depending on the context.

With regard to funding a business, capitalization means all the money received by that business in exchange for long-term debt and equity. If a business shows $10,000,000 of long-term debt and $20,000,000 of equity, the business is said to be capitalized in the amount of $30,000,000. 

For a publicly traded company, capitalization has the same meaning when looking at its financial statements, but in addition, it can also mean the total market value of all its publicly traded securities.  Therefore, if a publicly traded company has 20,000,000 shares outstanding, and a share trades for $20, the company’s capitalization as determined by the market is $400,000,000.

In the accounting context, capitalization is the process of recording the total cost of acquiring an asset that has a useful life of more than one accounting period.  Instead of expensing it, the asset is listed on the company’s balance sheet and depreciated over its useful life.  Assume ABC Corp purchases a machine for $50,000 that will last five years.  ABC also pays an additional $2,000 to deliver it and $3,000 to install it.  So in addition to the $50,000 ABC paid for the machine, ABC will capitalize both the $2,000 delivery fee and the $3,000 installation fee. The total capitalized cost of the machine is $55,000, which will be the depreciable cost basis on ABC’s books.   

Related Articles
  1. Investing

    What's Share Capital?

    Share capital, also called equity financing, is the total amount of money and property a company has received for selling its shares to shareholders.
  2. Investing

    What is the Price-to-Sales Ratio?

    The price-to-sales ratio is an indicator of the value placed on each dollar of a company’s sales or revenues.
  3. Insurance

    What Does an Underwriter Do?

    In the investment world, an underwriter is a company that helps corporations or other issuing bodies distribute their securities.
  4. Investing

    Understanding Long-Term Debt

    Long-term debt is any debt or liability that is due in more than one year.
  5. Taxes

    Calculating Capital Appreciation

    Capital appreciation is an increase in an investment’s market price.
  6. Investing

    Understanding Historical Cost

    Historical cost equals the original purchase price of an asset recorded on a company’s balance sheet.
  7. Investing

    Understanding Capital Assets

    A capital asset is one that a company plans on owning for more than one year, and uses in the production of revenue.
  8. Small Business

    Explaining Cost Of Capital

    Cost of capital is the cost of funds used to finance a business.
  9. Small Business

    Understanding Capital

    Capital has a variety of meanings, but it generally refers to financial resources.
Hot Definitions
  1. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  2. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  3. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  4. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  5. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  6. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
Trading Center