Definition:

A capital asset is a long-term asset that a company owns or uses in its operations to generate income. It’s typically expected to provide benefits over a period of more than one year.

Examples of capital assets:

  • Property, plant, and equipment (PP&E): Buildings, machinery, equipment, and vehicles.
  • Intangible assets: Patents, copyrights, trademarks, and goodwill.
  • Investments: Stocks, bonds, and other investments.

Key points about capital assets:

  • Depreciation or amortization: Capital assets are typically subject to depreciation or amortization, which is the process of allocating their cost over their useful life.
  • Gain or loss: When a capital asset is sold, the difference between its selling price and its adjusted basis (cost minus accumulated depreciation or amortization) is a capital gain or loss.
  • Tax implications: The tax treatment of capital gains or losses depends on the holding period of the asset.

Why are capital assets important?

  • Financial statements: Capital assets are reported on the balance sheet as long-term assets.
  • Profitability: Capital assets are used to generate income and contribute to a company’s profitability.
  • Tax implications: The tax treatment of capital assets can have a significant impact on a company’s tax liability.

In essence, a capital asset is a long-term asset that a company owns or uses in its operations to generate income, and it’s a crucial component of a company’s financial statements.