Question

Define the term capitalisation. Explain in detail over-capitalisation and under - capitalisation.

Answer 1

Answer:

Capitalization is the process of recording an expense or cost in a permanent account and systematically allocating over future periods. In other words, capitalization takes an expense, which would normally be recorded in a temporary account, and records it in a permanent account like an asset account.

Under capitalisation is just the reverse of over capitalisation, a company is said to be under capitalised when its actual capitalisation is lower than its proper capitalisation as warranted by its earning capacity.

Explanation:

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Answer 2

Answer:

Over Capitalization: A company is said to be overcapitalized when the aggregate of the par value of its shares and debentures exceeds the true value of its fixed assets.In other words, over capitalisation takes place when the stock is watered or diluted. ... In both the situations there is over capitalisation.