Legal Definitions - capitalize

The term capitalize refers to several distinct financial and accounting practices, all centered around the concept of treating something as a long-term asset, a source of funding, or a long-term value.

• It can mean to reinvest earnings back into a business to increase its long-term value or assets, rather than distributing those earnings as immediate profits.
• It also refers to the accounting practice of recording a significant expenditure, such as the purchase of property or major equipment, as a long-term asset on a company's financial statements. This means the cost is spread out and deducted over many years (depreciated) rather than being expensed entirely in the year of purchase.
• Additionally, it can mean to provide funding or investment for a business or venture, thereby supplying it with the necessary capital to operate and grow.
• In a financial valuation context, to capitalize income means to calculate the present value of a future stream of income or benefits.

Examples:

• A successful software company decides to use all of its annual profits to build a new, larger headquarters and invest heavily in developing a new product line, rather than issuing dividends to shareholders. In this scenario, the company is capitalizing its earnings by converting them into long-term assets (the new building) and future growth potential (new product development).

• A construction firm purchases a new, state-of-the-art crane for $1 million, which is expected to last for 15 years. Instead of deducting the entire $1 million as an expense in the year of purchase, the firm records it as an asset on its balance sheet and will deduct a portion of its cost each year over its useful life. This is an example of the firm choosing to capitalize the cost of the crane, treating it as a long-term investment rather than an immediate operational expense.

• A group of venture capitalists invests $5 million into a promising biotechnology startup to fund its research and development, clinical trials, and initial operational costs. By providing this funding, the venture capitalists are effectively capitalizing the startup, supplying it with the necessary financial resources to establish and grow its business.