Credit gives the word to pay either by repaying it or returning those resources later. In other words, this credit is the method of making the reciprocity formal, legally enforceable, and of course, extensible to a vast group of people who are not related.
However, the resources provided may be financial or have goods or services, like consumer credit. The credit covers any form of deferred payment. Credit generally gets extended by the creditor, the debtor or lender, and sometimes the borrower.
In accounting terms, capitalization is a rule to recognize a cash costfor an asset and show it on the balance sheet, and not as an expense in the income statement. Capitalization is a quantitative assessment of the running capital condition of an organization. Here, the cost of capital is present in the form of long-term debt, the corporation stock, and retained earnings.
Capitalization is of two types - accounting and finance.
In accounting, companies should record their expense during the accounting period the revenue has incurred. For instance, office supply expenses are shown in the period in which they have been used as they have a short period for usage. However, in a large organization case, the equipment use date is more than one accounting period. These are mainly fixed assets such as office buildings, cars, computers and the like. The item costs are included in the general ledger and come as the historical cost of an asset. This is where the costs are capitalized and not expensed.
Another form of capitalization is a company capital structure which mainly shows the book value of capital cost. It is the sum of the company’s debt, retained earnings and stocks. So, the alternative to book value is market value. The cost of capital mainly depends on the company’s stock. In the calculation, you have to multiply the company’s share by the number of its outstanding share in the market.
If the total outstanding share is 1 billion with stock priced at $ 10, the market capitalization would be $10 billion. So, companies with high market capitalization are to be termed large caps.
The capitalisation rate in real estate is used to show the return on the invested property. It has the initial purchase price percentage and indicates the net loss or gain over a year. Determining a property’s value. So, the calculation of capitalization goes as:
Net operating income/ current market value X 100%
