Financial Terms / capitalization

# Understanding Capitalization Accounting

Capitalization is an accounting method that allows for an asset to be depreciated over its useful life.

## Formula

``Cap Rate = NOI/Market Value``

## How do I calculate the capitalization?

```Calculating capitalization can help you evaluate the yield of a real estate investment property. The most commonly used metric for this is the cap rate, which is calculated by dividing the Net Operating Income (NOI) by the current market value of the property. The formula is:

`Cap Rate = NOI/Market Value`

It's important to note that real estate investors typically use cap rates to compare the relative value of different properties and it is not a measure of absolute performance. To help you calculate the cap rate, you can use common spreadsheet programs like Sourcetable.```

## What is Capitalization?

`Capitalization is an accounting method that allows an asset to be depreciated over its expected life and an expense to be expensed in the period it was incurred. It is used in both accounting and finance and is an accounting rule that recognizes a cash outlay as an asset on the balance sheet.`

## How does Capitalization measure a firm's capital structure?

`Capitalization measures a firm's capital structure by calculating the cost of capital, which is the sum of the cost of debt and the cost of equity.`

## Key Points

How do I calculate capitalization?
`Cap Rate = NOI/Market Value`
Capitalization is an accounting method
Capitalization is an accounting method that allows a firm to record an asset as an expense over its lifetime. This helps the firm to spread the cost of the asset over multiple years rather than expensing the entire cost up front.
Capitalization allows an asset to be depreciated over its lifetime
Capitalization allows a firm to depreciate an asset over its lifetime. This means that the firm can spread out the cost of the asset over multiple years instead of taking the entire cost up front. By doing this, firms can protect themselves from sudden costs that could negatively impact the bottom line.
Capitalization is a quantitative assessment of a firm's capital structure
Capitalization is also a quantitative assessment of a firm's capital structure. This means that firms can use capitalization to determine the relative proportion of debt and equity held by the firm. By looking at the capital structure, firms can make informed decisions about how to best allocate their resources and maximize their returns. 