what is to capitalize 
to capitalize is to record a cost or expense on the balance sheet for the purposes of delaying full recognition of the expense in general capitalizing expenses is beneficial as companies acquiring new assets with long term lifespans can amortize or depreciate the costs this process is known as capitalization capitalization may also refer to the concept of converting some idea into a business or investment in finance capitalization is a quantitative assessment of a firm s capital structure when used this way it sometimes also means to monetize investopedia jake shiunderstanding how to capitalizeone of the most important principles of accounting is the matching principle the matching principle states that expenses should be recorded for the period incurred regardless of when payment e g cash is made recognizing expenses in the period incurred allows businesses to identify amounts spent to generate revenue for assets that are immediately consumed this process is simple and sensible however large assets that provide a future economic benefit present a different opportunity for example a company purchases a delivery truck for daily operations the truck is expected to provide value over a period of 12 years instead of expensing the entire cost of the truck when purchased accounting rules allow companies to write off the cost of the asset over its useful life 12 years in other words the asset is written off as it is used most companies have an asset threshold in which assets valued over a certain amount are automatically treated as a capitalized asset benefits of capitalizationcapitalizing assets has many benefits because long term assets are costly expensing the cost over future periods reduces significant fluctuations in income especially for small firms many lenders require companies to maintain a specific debt to equity ratio if large long term assets were expensed immediately it could compromise the required ratio for existing loans or could prevent firms from receiving new loans also capitalizing expenses increases a company s asset balance without affecting its liability balance as a result many financial ratios will appear favorable despite this benefit it should not be the motivation for capitalizing on an expense depreciationthe process of writing off an asset over its useful life is referred to as depreciation which is used for fixed assets such as equipment amortization is used for intangible assets such as intellectual property depreciation deducts a certain value from the asset every year until the full value of the asset is written off the balance sheet 1depreciation is an expense recorded on the income statement it is not to be confused with accumulated depreciation which is a balance sheet contra account the income statement depreciation expense is the amount of depreciation expensed for the period indicated on the income statement the accumulated depreciation balance sheet contra account is the cumulative total of depreciation expense recorded on the income statements from the asset s acquisition until the time indicated on the balance sheet for leased equipment capitalization is the conversion of an operating lease to a capital lease by classifying the leased asset as a purchased asset which is recorded on the balance sheet as part of the company s assets the value of the asset that will be assigned is either its fair market value or the present value of the lease payments whichever is less also the amount of principal owed is recorded as a liability on the balance sheet there are strict regulatory guidelines and best practices for capitalizing assets and expenses market capitalizationanother aspect of capitalization refers to the company s capital structure capitalization can refer to the book value of capital which is the sum of a company s long term debt stock and retained earnings which represents a cumulative savings of profit or net income the alternative to the book value is market value the market value of capital depends on the price of the company s stock it is calculated by multiplying the price of the company s stock by the number of equity shares outstanding in the market if the total number of shares outstanding is 1 billion and the stock is currently priced at 10 the market capitalization is 10 billion companies with a high market capitalization are referred to as large caps companies with medium market capitalization are referred to as mid caps while companies with small capitalization are referred to as small caps 2it is possible to be overcapitalized or undercapitalized overcapitalization occurs when earnings are not enough to cover the cost of capital such as interest payments to bondholders or dividend payments to shareholders dividends are cash payments made to shareholders by companies undercapitalization occurs when there s no need for outside capital because profits are high and earnings were underestimated capitalized cost vs expense