What does "capitalizing" mean in accounting terms?

Shurwhynot

If you are to capitalize something what does this refer to?

Baby4

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hivizman

Capitalization is often used in the context of treating something as an asset that would normally be accounted for as an expense. So you can talk of "capitalizing interest", when interest payable on a loan taken out to finance the acquisition or more usually the construction of an asset (for example, a building) is treated as part of the cost of the asset rather than as an expense. Another common situation is "capitalizing research & development expenditure", where in certain cases companies will treat qualifying development costs as giving rise to an asset rather than as expenses.

There's a less common, and now a bit old-fashioned, sense for "capitalization". Companies sometimes use their reserves (such as a share premium account or retained earnings) to issue bonus shares (the reserve is debited and share capital is credited with the nominal value of the shares issued). This can be referred to as "capitalizing reserves".