Our Recommendations :-
Follow CA Final FB Page

Explain the theories to determine the amount of capitalization?

Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 kiran asked over 2 years ago

Hi Can you please Explain the theories to determine the amount of capitalization.

    0       0 Answer Now Comment Report
1 Answers
Important Note – Preparing for CA Final?
CAKART provides Indias top faculty each subject video classes and lectures – online & in Pen Drive/ DVD – at very cost effective rates. Get video classes from CAKART.in. Quality is much better than local tuition, so results are much better.
Watch Sample Video Now by clicking on the link(s) below – 
For any questions Request A Call Back  
Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 Chirag answered over 2 years ago

**Explain the theories to determine the amount of capitalization.** The two main theories which are involved with the amount of capitalization are as follows:- 1) **Cost Theory** - In this theory the value of the company is decided by adding certain factors such as:- (i) Cost of fixed assets i.e. Machinery, mechanical items (ii) Working capital i.e. the capital which is required for continuous operation of the company (iii) Cost of establishment of business promotion i.e. Expenses in doing the advertisements These factors allow the promotion team to know the amount of capital which has to be raised to fulfill the promotion job. The true income of the company is been found out by its earning not by its investment in other states. For example if some assets becomes out of date and some idle then the earnings will fall but that fall of capital won't affect the investment made by the company in other company's business. 2) **Earnings Theory**: In this theory true value of an enterprise depends on its earnings capacity. The value of the company capitalization will be same as the estimated earning of the company. To find out this a company has to prepare a profit and loss account and then check regularly to see the effect of their sales over the years to find out how correct there estimations are. The earnings will be compared to the actual earning and the adjustment will be made according to that. The promotion team will then see the up and down of the earnings and then overall decision will be taken on management and how to simulate the earning to increase the revenue of the company. For example if there is a company which has an estimated average profit of Rs. 25,000 in first few years and earning a return of 5% on their capital. The capitalization will be: (25,000*100)/5 = Rs. 5, 00,000

    0       0 Comment Report
Get Notifications
Videos
Books
Notes
Loading
SIGN UP
Watch best faculty demo video classes

These top faculty video lectures will
help u prepare like nothing else can.