Capitalization of Profits – Definition

Cite this article as:"Capitalization of Profits – Definition," in The Business Professor, updated January 10, 2020, last accessed October 20, 2020,


Capitalization Of Profits Definition

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.

A Little More on What is Capitalization Of Profits

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‚Äô 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.

Reference for ‚ÄúCapitalization Of Profits‚ÄĚ ‚Äļ Accounting

Academic research on ‚ÄúCapitalization Of Profits‚ÄĚ

Capitalization of Profits as Dividends, Sastry, S. V. N., & Balakrishnan, J. (2018, October). Capitalization of Profits as Dividends. In ICRTEMMS Conference Proceedings (Vol. 437, No. 440, pp. 437-440). Swarna Bharathi lnstitute of Science and Technology. The payment of cash dividend may not be possible for all the companies in all the years as it may affect the working capital position or liquidity position of the companies. The bonus issue also called stock dividends is one of the forms of dividend through which the companies need not disburse their liquid funds by way of distribution of dividends and at the same time they can also satisfy the desires of their shareholders by capitalizing the company’s free reserves and issuing additional shares to the existing shareholders at free of cost or as a gift. That is the reason why the stock dividends are also called bonus issue of shares or capitalization of profits or ploughing back of profits. The purpose of writing this article is to elaborate on the meaning of stock dividend ie., bonus shares, the legal procedures to be followed by various companies in India for bonus issue, the effect of issue of bonus shares on the paid-up capital of the company and the advantages and disadvantages of issue of bonus shares to the company and also to the shareholders.

Capitalization of Profits by Joint-Stock Companies, Sanger, C. P. (1903). Capitalization of Profits by Joint-Stock Companies. Jurid. Rev., 15, 1.

Will fisheries never be profitable? isheries never be profitable? Treadmill effects and capitalization of profits in Norwegian fisheries, Ishimura, G. Will fisheries never be profitable? isheries never be profitable? Treadmill effects and capitalization of profits in Norwegian fisheries.


Valuation effects of Greek stock dividend distributions, Papaioannou, G. J., Travlos, N. G., & Tsangarakis*, N. V. (2000). Valuation effects of Greek stock dividend distributions.¬†European Financial Management,¬†6(4), 515-531. This study analyses the price reaction to stock dividend distributions by firms listed on the Athens Stock Exchange on both the announcement and the ex‚Äźdividend day. It also analyses earnings per share, dividends per share and trading volume in the pre‚Äź and post‚Äźannouncement periods. The findings show statistically insignificant abnormal returns on both the announcement and the ex‚Äźdividend day. The analysis does not reveal any significant change in earnings per share and dividends per share, but it does reveal a significant decline in the market‚Äźadjusted trading volume in the post dividend period. The findings, based on a different institutional environment, expand the empirical evidence on the value effects of stock dividends.


Corporate governance issues and control in conditions of unstable capital risk, Lebedeva, T. E., Akhmetshin, E. M., Dzagoyeva, M. R., Kobersy, I. S., & Ikoev, S. K. (2016). Corporate governance issues and control in conditions of unstable capital risk. International Journal of Economics and Financial Issues, 6(1S), 25-32. In the context of deep and wide-ranging transformation of the Russian economy caused by a scientific and technological progress and its systemic and structural reforms undertaken in the process of forming a market economy and political democracy, before the Russian economic science alone raises issues of improving the control system. The main role plays a corporate governance practice, as it is large corporations is defined as the appearance of the national economy into the world economy and the main directions of its development, as well as the efficiency and competitiveness in the domestic and foreign markets. The problem of corporate governance research at the present time is one of the most important trends of modern economic research. Corporations in Russia still cannot cope with the role of a key link in our economy. In industrialized countries, it is an inherent part of the system of power (Osipov et al. 2016). At present, the largest business group management system is constantly refined. Develop vertically integrated holding companies, the combined unified scheduling, financing, coordination and supervision. The issues related to the optimization of corporate governance in the industrial holding company, while ensuring a reasonable level of autonomy of subsidiaries.

Was this article helpful?