Capitalization of Profits - Explained
What is the Capitalization of Profits?
Written by Jason Gordon
Updated at April 17th, 2022
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What is the Capitalization Of Profits?
Capitalization of profits refers to the conversion of a company's retained earnings into capital stock which can be issued as a form of dividends to shareholders or additional stock shares. The retained earnings of a business are the profits held by the business over a period of time if these earnings are converted into share capital that can be paid as bonuses to shareholders or issued as extra stock shares, capitalization of profits has taken place. Oftentimes, corporations carry out capitalization of profits when they want to pay dividends to shareholders or issue a number of newly created shares to the shareholders. The distribution of these shares is in alignment with the ownership levels of the shareholders, that is, the proportion of the company's shares they hold.
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How Does Capitalization Of Profits Work?
Capitalization of profit simply entails the transfer of funds from retained earnings to paid-up capital, this is achieved by converting a company's retained earnings to capital stock. The capital stock is then disbursed to the shareholders in form dividends or additional shares. Capitalization of profit does not affect the book value of a company or shareholders equity. The term 'capitalization' is not only used in finance, business and investment industries, but this term can also refer to the conversion of just anything. The act of turning something into capital is capitalization. When used in the context of business, capitalization of profits is an act of converting the retained earnings of a company into capital stock.