Amortization vs Capitalization: Difference and Comparison

Amortizations and Capitalization These are two names for the principle of valuation of assets in accounting. When a person receives the cost of the asset, he considers depreciation and amortization carefully. 

Incorporeal property amortization further extends the life of its assets. The full amount of the company and stock in capitalization is the retained earnings of the long-term debt.

Key Takeaways

1. Amortization is the process of gradually reducing the value of an intangible asset over time, while Capitalization is the process of recognizing the cost of an asset as an expense over its useful life.
2. Amortization is used for intangible assets like patents, trademarks, and copyrights, while Capitalization is used for tangible assets like buildings, equipment, and machinery.
3. Amortization is a method of accounting that spreads the cost of an asset over its useful life. At the same time, Capitalization is a method of accounting that recognizes the cost of an asset as an expense over a specific period.

Amortizations vs Capitalization

The difference between Amortization and capitalization is that amortization is applied only to a specific group of assets which is a kind of recovery period. Capitalization is a type of accounting method.  It includes a cost that adds to the value of an asset and has to be incurred over the entire useful life of the asset.

The amortization idea is also used in lending. It is used to reduce the starting balance of the loan, the interest for each due payment, and the principal in an amortization.

The amount remaining in the last loan is reduced. Amortization is used to write off the cost of intangible assets that have a specific useful life.

Capitalization is a type of accounting method.  It includes a cost that adds to the value of an asset and has to be incurred over the entire useful life of the asset, not the amount of time it was originally spent on.

In addition, market capitalization refers to the number of outstanding shares multiplied by the share price, which is a measure of a company’s overall market value.

Comparison Table

Parameters of comparison	Amortization	Capitalization
Definition	Amortization is also known as deducting capital expenditure over some time.	Capitalization consists of the long-term loans given to the company in addition to the equity on the balance sheet.
Finance	Amortization” has two meanings in finance. First, it reflects the schedule of payments, and second, it reflects the cost expense of the intangible asset.	In finance, Capitalization is a type of quantitative assessment of a firm’s capital structure.
Use	The term amortization is used for a special case and is a concept for borrowings.	Capitalization is used for asset-intensive, such as for manufacturing, etc.
History	The first known use of amortization was in 1830.	The first known use of Capitalization was in 1851.
Example	Auto loans, and home equity loans are some examples of amortization.	If a company purchases an item, the cost will not be incurred but will be capitalized as a fixed asset if the balance sheet is used.

What is Amortization?

Amortization is the process of multiplying an asset’s expense by the expected period of its use, which serves to move the asset from one location to the income statement from the financial position statement. It shows the expenditure of an untouchable property as a whole in its real life. 

Amortization is mostly used to write off the expense of intangible assets that have a singular use over a lifetime.  Patents, copyrights, taxi licenses, and trademarks are all examples of intangible assets.

The amortization idea is also used in lending. It is used to reduce the starting balance of the loan, the interest for each due payment, and the principal in an amortization.

The amount remaining in the last loan is reduced. Amortization is used to write off the cost of intangible assets that have a specific useful life.

Amortization is the process of paying off the loan or mortgage in a range of certain payments.  The monthly instalment remains the same, but principal and interest are paid separately in different months. 

The interest amount is initially high.  Little by little, the remaining loan balance gets reduced, the interest money also keeps coming down, and the loan or mortgage is fully paid off when the maturity period is over.

What is Capitalization?

Capitalization is a type of accounting method. It includes a cost that adds to the value of an asset and has to be incurred over the entire useful life of the asset, not the amount of time it was originally spent on.

In addition, market capitalization refers to the number of outstanding shares multiplied by the share price, which is a measure of an overall market value of a company.

Capitalization has many other meanings.  In accounting, capitalization refers to the expense of inheriting costs over the life of the asset other than the period in which it was incurred. 

Instead of listing the asset as principal, the asset is accumulated on a company’s balance sheet and depreciated over its notable life.

Capitalization refers to the combination of a business’s stock, long-term debt, and retained earnings, and it is used in finance. Continuing earnings are the percentage of net earnings the company uses to recoup the money in its particular business or to pay off debt.

The term stock market finance sector capitalization is also used to count the trade union‘s remaining shares multiplied by the stock’s share price. The other name of capitalization is market capitalization.

Main Differences Between Amortization and Capitalization

1. Amortization is also known as deducting capital expenditure over some time. Capitalization consists of the long-term loans given to the company in addition to the equity on the balance sheet.
2. Amortization is applied only to a specific group of assets which is a kind of recovery period, whereas Capitalization is a type of accounting method which includes a cost that adds to the value of an asset and has to be incurred over the entire useful life of the asset.
3. The term amortization is used for a special case, while the term capitalization is a kind of broad term.
4. In finance, amortization and capitalization have different meanings. Amortization” has two meanings. First, it reflects the schedule of payments, and second, it reflects the cost expense of the intangible asset, while Capitalization is a quantitative assessment of a firm’s capital structure. 
5. The amortization concept is used for borrowings, whereas capitalization is used for asset-intensive, such as for manufacturing, etc.

References

1. https://www.sciencedirect.com/science/article/pii/0165410195004106
2. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=58661
3. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2952388

Last Updated : 13 July, 2023