Capitalization refers to the amount of capital required by a business enterprise. Capital can be obtained in the following ways: Therefore, capitalization is the sum total of the funds received through shares, bonds, loans, and retained earnings. In other words, the sum total of fixed capital and working capital forms capitalization. Some notable definitions of the term capitalization are stated and discussed below. 1. A. S. Dewing: "The term capitalization or the valuation of capital includes the capital stock and debt." 2. Gestenbergh: "For all practical purposes, capitalization means the total accounting value of all the capital regularly employed in the business." When determining the capital of a company, the promoter must consider the cost of fixed assets, as well as the cost of establishing, organizing, and running the business, working capital, and sufficient funds to meet contingency demand. The term capitalization is closely associated with the earning capacity of an enterprise. Both overcapitalization and undercapitalization are dangerous for organizations. A stage of optimum capitalization is the desired goal of every enterprise. This is the stage where the company earns a fairly good return. In a nutshell, these definitions indicate that capitalization refers to all the long-term funds raised through issuing shares, debentures, and loans from specialized financial institutions. Suppose that a company has the following information on the liabilities side of its balance sheet: Capitalization, in this case, amounts to the sum total of long-term funds. These are: Now, it's clearly seen that capitalization—in a broader sense—refers to the process of determining the plan or patterns of financing. In a narrower sense, capitalization is the sum total of all long-term securities issued by a company and the surpluses not meant for distribution. It should also be noted that the term capitalization is used only for companies and not for sole proprietorships. Capitalization is capital plus long-term loans and retained earnings.What is the Meaning of Capitalization?
Definitions of Capitalization
Example
$
Equity share capital
4,000,000
Preference share capital
1,000,000
Debentures
2,000,000
Loan from IBRD
2,500,000
Loan from IFC
1,500,000
Creditors
500,000
Outstanding
20,000
Capitalization in Business Finance FAQs
A capitalisation table shows the amount of money that has been borrowed by a business and what each creditor requires in terms of interest. It also shows the day-to-day trading activities such as sales, purchases and other financial transactions. A capitalisation table can be used to compare sales with debtors, creditors, purchases with suppliers or financial transactions.
A capitalisation table is needed because it shows the amount of money that has been borrowed by a business and what each creditor requires in terms of interest. It also shows the day-to-day trading activities such as sales, purchases and other financial transactions and enables the company to compare sales with debtors and creditors, purchases with suppliers and financial transactions.
Capitalisation refers to the amount of capital required by a business enterprise. Capital can be obtained through issuing equity and preference shares, Debentures, loans as well as Retained Earnings. The total amount of capital is divided into share capital, preference capital and Debentures.
Shareholders’ equity (or stockholder's equity), also referred to as book value or net worth, represents the total assets minus total liabilities of a company. Capitalization, on the other hand, refers to the amount of money required by a business enterprise. Capital can be obtained through issuing equity and preference shares, Debentures as well as Retained Earnings. The total amount of capital is divided into stockholder's equity, preference capital and Debentures.
Financial Ratios are mostly used for measuring performance. Some examples of Financial Ratios are return on equity, current ratio, quick ratio and leverage.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
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