Capitalization has various meanings depending on the context. In Accounting, capitalization is a method where the cost of an asset is expensed over the useful life of that asset rather than the period in which the cost was incurred originally.
In finance, capitalization is the cost of Capital in the form of a company’s long-term debt, stock, retained Earnings, etc. Other than that, market capitalization is another term which refers to the number of outstanding shares that is multiplied by the share price.
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Capitalization in accounting is when the company has to record the expense in the same accounting period in which the company has incurred the related revenue.
For example, Company ABC purchases office supplies. These supplies are generally expensed in the period when they are purchased and are expected to be consumed within a short span of time. However, if company ABC buys larger office equipment like an air conditioner, the product may provide benefit for more than one accounting period. The air-conditioner then becomes a fixed asset. The cost is recorded on the General Ledger as the historical cost of the asset. Therefore, this cost is said to be capitalized and not expensed.
Capitalization in finance refers to the debt and equity of the company. It also refers to market capitalization. Market capitalization is the most recent market value of a company’s outstanding shares. Investors often refer to market capitalization value to rank companies and compare relative sizes in a particular industry or sector. To determine a company’s market share price, refer to the following formula:
Market Capitalization= Current Market Price of Share Total Outstanding Shares
Market Capitalization has four different categories. They are mentioned below: