Capitalize

Reviewed by Apoorva | Updated on Sep 30, 2020

What is Capitalising?

Capitalising is a method of accounting where the value of an asset is expensed over the useful life of that asset, and not just during the period of incurring the cost. An item is considered to be capitalised when it is seen as an asset rather than as an expense. That is the expenditure on this item is to be recorded in the balance sheet rather than in the income statement.

When it comes to the finance sector, capitalisation means the cost of capital that takes the form of a corporation’s stock, retained earnings, and long-term debts. On the other hand, the number of outstanding shares multiplied by the share price refers to market capitalisation.

Capitalisation in Finance

Here, capitalisation refers mostly to a company’s capital structure. It points at the book value cost of capital, i.e. the sum of a company’s stocks, retained earning, and long-term debt.

Similar to book value is the market value; it depends on the price of the company’s stock. You can calculate the market value cost of capital by multiplying the company’s shares with the number of outstanding shares in the market. Consider that a company has a total of 10,000 outstanding shares, and the stock has a price of Rs.20. The market capitalisation of the company is Rs.2,00,000.

Companies are categorised as large-cap, mid-cap, and small-cap based on their market capitalisation value. A company with a market capitalisation of more than $10 billion is called a large-cap company, the one with a market capitalisation between $2 billion and $10 billion is a mid-caps company, and between $300 million and $2 billion is a small-caps company.

What is Overcapitalising and Undercapitalising?

Overcapitalisaing is a state when the company earnings are not sufficient to cover the cost of capital. One such situation can be when the company has no capital to pay dividends to shareholders.

Undercapitalisation is a state when the company does not need funds from outside because it has earned high profits, which was underestimated before.

Related Terms

  • Statutory Audit

    A statutory audit is a legally required check of the accuracy of the financial statements and records of a company or government.   Read more


  • Revaluation Reserve

    Revaluation fund is the accounting term utilised when a business establishes a line item on the balance sheet for the purpose of maintaining a contingency account connected to other assets.   Read more


  • Inflation Accounting

    Inflation accounting is a unique method used to weigh on the published statistics of multinational firms in the effects of soaring or plummeting prices of products in some areas of the world.   Read more


  • Operating Revenue

    Operating revenue refers to the revenue generated by a company from its primary activities.   Read more


  • Escalator Clause

    An escalator clause is also known as an escalation clause, where the provision allows for an automatic increase in the wages or prices.   Read more


  • Agency Problem

    The agency problem is a scenario of a conflict of interest which is inherent in all relations wherein one party is anticipated to operate in the best interests of another party.   Read more


Recent Terms

  • Amortisation

    Amortisation is an accounting strategy used to regularly reduce a loan's book value or an intangible asset's book value over a given period of time.   Read more


  • Rationalisation

    The reorganisation of a firm with the view of enhancing the efficiency of the operation is referred to as the rationalisation.   Read more


  • Profit Centre

    A profit centre refers to a branch, unit, or division of a company which directly adds or which normally adds to the bottom-line or profits of the company as a whole.   Read more


  • Authorised Share Capital

    Authorised share capital is the number of stock units (shares) that a company may issue, as set out in its association memorandum or incorporation papers.   Read more