Capitalization Of Long Term Assets

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Capitalization also refers to the market value of a company or business.

Another aspect that we need to look into is to differentiate between assets that can be capitalized. For an asset to be capitalized, it needs to meet certain guidelines. For instance PPE (plant, property and equipment) needs to be owned. It simply cannot be rented. The assets need to be in use for business purposes. Lastly the assets should have a determinable useful lifespan which must be greater than one year. Also companies set capitalization limits below which expenditures are deemed too immaterial to capitalize.

Capitalization also means the market value of a business. It is calculated as the total number of shares outstanding, multiplied by the current market price of the stock. The market value of capital depends on the price of the company’s stock. Companies with a high market capitalization are referred to as large caps; companies with medium market capitalization are referred to as mid-caps, and companies with small capitalization are referred to as small caps.

Now let’s come to the main area of interest. Which assets can be capitalized?

In order to answer this question we need to delve deeper into the simple meaning of capitalization. When the value of money leaves the company it becomes an expense. However the money spent on assets does not leave the company. It is not recorded as an expense. /the value remains on the balance sheet.

The advantages and disadvantages are laid out in front of you. Now it up to individuals and businesses to comprehend whether long term assets is suitable for them. A diversified portfolio is a great way to reduce risk. Almost every financial instrument has its set of advantages and disadvantages. It is your call as to which asset you are planning to buy. Consult a tax professional if you are filled with uncertainties.


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