What Is a Capital Asset? Meaning, Various Types and Example


Capital Assets - Basic Meaning & Definition

All categories of stocks, bonds, property, and machinery an organisation or an individual holds are capital assets. They can be tangible and intangible, depending on whether they are physical or non-physical in form.

Capital assets are one of the foundations of an organisation. Companies, operating in asset-heavy industries, majorly invest a large portion of their funds in these assets. Here, capital is the money that helps run businesses efficiently. Because these assets serve the needs of daily operations, they are capital assets. These capital assets are called 'fixed' assets when they are used regularly over a long period.

KEY TAKEAWAYS

  • Capital assets generate revenue and ensure the smooth functioning of the company's operations.
  • A capital asset's life span is usually one year or greater than that.
  • Capital assets can be both tangible and intangible.
  • In comparison with ordinary assets, capital assets help in the daily operations of a company.

Types of Capital Assets in Business

There are two categories of capital assets in businesses:

  • Short-term Capital Asset
  • Capital assets held for 36 months or less from the date of transferring assets to owners are termed short-term capital assets. From fiscal year 2017-18, immovable properties held for less than 24 months are classified under short-term capital assets.

    Some assets are classified as short-term assets if their holding period is less than 12 months. This applies only to assets with the date of transfer after 10th July 2014. The assets withholding less than 12 months are categorised as follows:

    a) Zero coupon bonds.

    b) Equity shares of any well-known company listed in India.

    c) Securities enlisted in India.

    d) Equity-related mutual fund units.

  • Long-term Capital Asset
  • Assets with a holding period of more than 36 months from the date of transferring to owners are long-term capital assets. Long-term capital assets are high-value investments held for long periods for capital appreciation.

    There is no specific formula for identifying an asset as long-term. As mentioned before, some assets held for 24 months are long-term capital assets, while for others, the holding period must be at least 12 months. One can find the record of these in the ‘Assets’ section of a company's balance sheet.

Selling or Maintaining Capital Assets

Businesses might decide to transfer capital assets by selling them, abandoning them, or trading them. Owning assets for more than one year is subject to capital gain or loss on sale. The difference between the purchase price and the sale price leads to capital gains. Capital assets can also be transferred through inheritance, will, gift, or succession.

However, a capital asset can also get damaged or diminish in value. When the market value of an asset is less than the enlisted value on the balance sheet, it is an impaired asset. Thus, when a capital asset is subjected to impairment, the asset value decreases causing a capital loss.

Examples of Capital Assets

Here is a list of examples of capital assets:

  • Furniture
  • Furniture includes items moved from one place to another. All of these items do not have any connection to the construction of a building. Examples are tables, chairs, shelves, bookcases, and others. Other than these, refrigerators and washing machines also fall in this category. These items serve the purpose of long-term use, and their value depreciates with time.

  • Buildings
  • Buildings are important assets that companies need to operate in their daily lives. Examples of buildings include office space, manufacturing plants, storage warehouses, retail stores, and others. For example, any company in an e-commerce platform mostly uses storage warehouses for storing goods after procuring from manufacturers to sell them later.

    Other businesses might utilise manufacturing plants for processing, gathering, and packaging raw materials into final goods and services.

  • Computer Equipment
  • Computer equipment includes desktops, laptops, servers, generators, and more. Because this type of equipment solves the daily requirements, their value depreciates. Computer equipment is considered a capital asset because of the following conditions:

    a) Any business can resell them to earn revenue.

    b) These equipment’s hold value for a year or more.

    c) A lump sum amount derived from selling the equipment's assets.

  • Machinery
  • This includes equipment that meets the daily requirements of employees. Some notable examples of machinery include Xerox machines, 3D printers, scanners, and others. Apart from these, machinery also considers tools and instruments businesses need for manufacturing goods and services. This might include drilling machines, concrete mixers, elevators, rock crushers, and so on.

Final words

Capital assets are those that have a long-term value that is higher than ordinary assets. Hence, they are often used as investments. Depending on their holding period, these assets can be short-term or long-term. Companies consider capital assets as an integral part of operations.

Capital assets yield immense potential for asset holders. However, holders of capital assets have to pay capital gains taxes upon making profits from selling them. Thus, it is essential to be aware of the rules of taxation and tax deductions/exemptions. Owners also need to be aware that their value may depreciate over time.

Other Words

  • Collateral
  • Credit Report
  • Credit Rating Agency
  • Creditworthiness

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