Capitalization Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Capitalization, written in plain English, along with examples of how it is used.
What is Capitalization?
(n) Capitalization is the process by which an expenditure included or grouped as a revenue expenditure is amortized to the future period as an asset, when the benefit out of such expenditure is not confined to the period under consideration. In accounting terms by capitalization of expenditure it is written of proportionally in the coming years instead of writing off it in the current period
History and Meaning of Capitalization
Capitalization is a common term used in accounting and finance. It refers to the process of converting the cost of an asset or expenditure into a long-term asset that can be written off gradually over time. This is done when the benefits derived from the expenditure last for more than one accounting period.
For instance, if a company purchases a building, the cost can be written off gradually over time since its benefit will be enjoyed for more than one accounting period. The process of capitalization is often done to ensure that the costs incurred by a business are spread over several periods, giving a more accurate representation of their profitability.
Examples of Capitalization
Company A purchases a piece of land and incurs expenses such as legal fees, surveying fees, and site preparation costs to get it ready for development. Instead of expensing these costs as incurred, the company capitalizes them as the benefit derived from them will last for more than an accounting period.
A software company develops a new software program. Instead of expensing the cost of development in the current year, the company capitalizes it over a period, as the product's benefits will last for many years.
In a merger or acquisition, any acquisition-related costs such as legal fees, banking fees, and other related fees are capitalized and amortized over a more extended period.
Legal Terms Similar to Capitalization
Amortization - the process of gradually writing off the cost of an asset over its useful life.
Depreciation - the process of gradually writing off the cost of an asset over its useful life, often done for tangible assets.
Operating expense - costs that are incurred and expensed in the same accounting period, and are subtracted from revenue to calculate net income.