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.
Related or Semi-related Video
Finance: What is a Current Asset?16 Views
Finance, a la shmoop. What is a current asset? Current yeah it's kind of a [Picture of a currant on a plant]
socialist raisin there, you know they all look about alike but that's a [Soldiers marching in front of Stalin with currants for heads]
currant and has nothing to do with current as cur-rent remember it like
your rent comes due soon, you rent a place for a year or less usually or at [Guy sticks his head out of pile of overdue bills]
least that's how long, you know lock in your rental rate. So if your [Someone signing a contract]
asset is current then it can be turned into cash within a year. That's how we
remember it here around Shmoop. Examples? A bond coming due in a year or less. [Bond document]
Companies store their cash all the time in short term paper like certificates of
deposit or Bank CDs which come due in less than a year. that's a current asset. [List of short-term paper]
And companies buy these kinds of bonds so they get a little more interest than
from their banks you know checking account. They buy stocks as well, shares [New interest rate is very small]
of goog can be easily converted into cash quickly. Shares in Google are a [Current asset stamp]
current asset. Ounces of gold, yep easily a current asset. All right you get the
idea, so what's not current well fourteen thousand acres of solar panel land that [Huge fields full of solar panels]
your company owns. If you ever had to sell it while there are very few buyers
and it likely would take more than a year just to figure out all the [Calendars popping up]
regulatory restrictions on selling it. A big old factory well can't sell that on [Red cross appears on a factory]
Amazon or Ebay, definitely not current. Your brand equity
in your corporation like the relationship you've developed with your
consumers, yeah it's another non-current asset you can't exactly go to the bank [Guy going up to the bank and pleading]
and convert brand loyalty to USD. So that's it current assets they live here [Arrow pointing to current assets on a balance sheet]
on this side of the balance sheet way up top in the good view seats high on the [Current assets in a tree]
vine of the tree. So put down those currants, stop ranting about the [Stalin holding a currant]
proletariat and for God's sake just buy some raisins. [Guy pointing to a box of raisins]
Up Next
A company’s ability to cover its short-term debts with its current liquid assets, which can be cash, inventory, and accounts receivables, is desc...
What is collateral? Any type of asset or property that a borrower pledges as security for a loan is classified as collateral. As the lender has a c...
What is a Hard Asset? A hard asset is a specific type of asset listed on a company’s balance sheet. It is an actual physical piece of property th...