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Definition: Capitalization

On the purchase of many assets, companies do not include the cost as an expense in the profit and loss statement for the current year. They often try to delay this expense by recording it as a long term asset. By doing so companies record it on the balance sheet as an asset and the total cost is spread over years for which the asset is supposed to provide economic benefits.

By being able to deduct the cost incurred today over a period of time companies protect the balance sheet from a net negative effect in the revenue. The costs are directly related to acquire an asset are also included in the price of the asset. The market capitalization of a firm is referred to as the sum of the outstanding shares and multiplied by its price.


A company bought a machines for 20,000 and incurred a cost of 2000 to bring it to the facility then the capitalization would be 22000. If a company has 2000 shares outstanding at Rs 500 each then the market capitalization of the company will be 2000*500



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