Concept
Capital assets are long-term properties owned by a business entity. These are not easily liquidated and are held for more than one financial year. Unlike current assets, these are not used up in the course of business operation and the money invested is not to realize immediately.
The main purpose of holding such assets is to be able to generate continuous profit. These assets are sold only in bankruptcy situation to pay for the debts or to meet the financial needs of restructuring. On a company’s balance sheet, these assets are shown under the category property, plant and equipment.
Every tangible capital asset has its own life span and during this time it depreciates. After full depreciation, a particular piece of an asset must be replaced with a new one or with some other type of asset.
Types
These include movable assets like machinery, immovable assets like land and property, tangible assets like vehicle and furniture and intangible assets like patents and goodwill. Raw materials used in production, business owners’ personal properties and trading stocks are not included in the capital asset.
People often confuse between capital asset and fixed asset, though, there is a slight difference between the two. Capital assets also include company’s long-term investments in the form of shares, bonds, debentures etc. while fixed assets don’t.
The proportion of capital asset in the total assets of a company depends on the nature of company’s business. In heavy industries, capital assets are used in greater proportion compared to consumer goods industries.
Gains
The value appreciation of a capital asset is called capital gain. It is realized when the capital asset is sold. On the other hand, if the value of the capital asset held by a company is lower at the time of selling the asset, the company experiences losses. Capital gains are taxed but usually at a lower rate than regular income in order to generate an incentive for investment.
