Capital Asset

Question: When is an asset not a capital asset?
Answer: When it has a useful life of less than one year.

We're going to get really philosophical here for a second. In day-to-day living, what a useful life is can be hard to define. Exit philosophers. Enter accountants. In the world of accounting, it is really very simple.

Capital assets that normally have a useful life longer than a year include buildings, land, and major equipment, but they can also include trademarks, patents, copyrights, trucks and even artwork. You normally would not be buying and selling a capital asset on a daily basis...it's there for the long term.

Capital assets are an important line item on a company's balance sheet. If Cupcakes For All bought a new automatic cupcake maker for $10,000 this year, that is the number it would put on its balance sheet. But capital assets are usually depreciated and become worth less over time. So by year five, the book value has decreased and it might only be listed as a $2,000 capital asset on their balance sheet.

Companies can set up their own definition of what assets should be capitalized and figure out the depreciation schedule for each. However, auditors from the IRS will spot those who depreciate an asset for a very long period of time in an attempt to inflate their profits with very small depreciation expenses.