Capitalization

What Does Capitalization Mean?

In the world of finance, capitalization refers to a company’s stocks, debt, and earnings. In accounting, however, it refers to the value of an asset as it contributes to a company’s operations over time, rather than its value at the time of purchase.

Insuranceopedia Explains Capitalization

In finance, capitalization refers to the amount of money invested in a business, which can come from various sources such as bank loans, personal savings, or earnings from previous ventures that are reinvested into the business. The amount of capital a business holds also affects how its insurance premiums are calculated, since insurers look at a company’s total value when pricing coverage.

In accounting, capitalization occurs when an item owned by a business is classified as an asset. If an item does not qualify as an asset, it is considered an expense. For example, an item that is purchased, used immediately, and disposed of quickly, such as a pen for office use, is classified as an expense. In contrast, an item that is more durable, costly, and serves a significant long-term purpose for the business is classified as an asset. For instance, when a company constructs a new building for its operations, that building is recognized as one of its assets. Because capitalized assets like buildings and equipment represent a large share of a company’s worth, they typically need to be insured under a commercial property insurance policy that covers the building, its contents, and stock.