Manufacturing companies heavily rely on their capital assets to generate revenues and profits. A capital asset can be tangible or intangible and movable or immovable. Typical forms of tangible capital assets for a manufacturing company include land, buildings, machinery, plants, factories and furniture. Typical intangible capital assets include goodwill, patents and trademarks.
A capital asset is acquired or developed by a manufacturing company with an intent to use it in the production process to generate benefit in the future. The asset must generate the benefit for the manufacturing company for a time period longer than a year. Manufacturing companies record tangible capital assets on their balance sheets as part of property, plant and equipment. Intangible assets, such as goodwill, trademarks and patents, are recorded as separate line items under the noncurrent assets section of the balance sheet. Typically, capital assets are depreciated over their useful lives and manufacturing companies show a separate line item called accumulated depreciation on their balance sheets.
Tangible Capital Assets
A manufacturing company ordinarily buys land to build plants and factories on it that house the company's equipment and machinery. During the factory construction phase, manufacturing companies are allowed to capitalize any costs associated with building their plants. Any equipment and machinery with a useful life beyond one year are capitalized.
For tax and accounting purposes, land is assumed to have indefinite life and is therefore not depreciated. Plants, buildings, factories, machinery and other equipment have finite useful lives and the company depreciates them before the cost basis is fully depleted. The U.S. generally accepted accounting principles, or GAAP, allow various depreciation methods, such as the declining balance method, the straight line method and sum-of-the-years' digits method.
In addition to outright purchase, companies can lease capital assets. Under GAAP, if certain criteria for a capital lease are satisfied, companies are required to capitalize assets and record the respective obligation on the liability side of the balance sheet. Typical forms of leased capital assets include buildings, land, machinery and equipment.
Intangible Capital Assets
A trademark is another example of capital assets the manufacturing company may record on its balance sheet as a result of merging or acquiring another company or defending the trademark. Ordinarily, it is difficult for manufacturing companies to estimate the cost basis of internally developed trademarks, and therefore they are seldom capitalized. Trademarks have indefinite lives and are not amortized.
Goodwill is another capital asset a manufacturing company puts on its balance sheet as a result of the acquisition of another company for a price that exceeds the fair value of net assets acquired. Under GAAP, goodwill is not amortized but is assessed annually for impairment. If the manufacturing company's management deems the underlying assets behind goodwill impaired, the company records an impairment charge on its income statement.
When a manufacturing company sells capital assets, it records the capital gains or capital losses. If the remaining unamortized cost basis exceeds the proceeds received on the sale, the company records a capital gain. Also, the manufacturing company can retire a capital asset by writing it off the books and recognizing it as a capital loss if there is an unamortized cost basis left for the asset.