Capital Asset§
Definition§
A capital asset is property held by an individual or business that provides a long-term economic benefit. Capital assets can be tangible, such as buildings, machinery, and land, or intangible, such as stocks, bonds, and patents. They are not intended for sale in the regular course of business, distinguishing them from inventory items.
Examples§
- Real Estate: A manufacturing company’s production plant or an investment firm’s office building.
- Equipment: Industrial machinery used by a factory for production.
- Vehicles: Corporate fleet cars and delivery trucks.
- Securities: Shares of stock held by an investment firm.
- Patents: Intellectual property held by a tech company.
Frequently Asked Questions (FAQs)§
Q1: What distinguishes a capital asset from inventory?
- Capital assets are used for long-term purposes and not primarily for sale. Inventory, on the other hand, consists of goods that a business sells in its regular course of operations.
Q2: How is the gain or loss from the sale of a capital asset treated for tax purposes?
- The gain or loss from the sale of a capital asset is classified as capital gain or loss, which is subject to different tax rates compared to ordinary income.
Q3: Can land be considered a capital asset?
- Yes, land is a capital asset. It is typically held for investment purposes or use in business operations.
Q4: Do capital assets depreciate over time?
- Tangible capital assets like buildings and equipment can depreciate over time. However, land and certain intangible assets like stocks do not depreciate.
Q5: What document details the usage and depreciation of capital assets?
- The financial statements, particularly the balance sheet and notes to the financial statements, provide detailed information about the company’s capital assets.
Related Terms§
- Fixed Asset: Capital assets that are tangible and used in the operations of the business, such as buildings, machinery, and equipment.
- Depreciation: The process of allocating the cost of tangible fixed assets over their useful lives.
- Intangible Assets: Non-physical assets like patents, trademarks, and brand recognition.
Online References§
- Investopedia on Capital Asset
- Internal Revenue Service (IRS) – Capital Assets
- AccountingTools: Capital Asset Definition
Suggested Books for Further Studies§
- “Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper
- “Financial Accounting: An Introduction to Concepts, Methods and Uses” by Roman L. Weil, Katherine Schipper, and Jennifer Francis
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
Accounting Basics: “Capital Asset” Fundamentals Quiz§
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