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A capital asset is one that a company plans on owning for more than one year, and uses in the production of revenue. Capital assets are listed on a company’s balance sheet as property, plant and equipment.

Typical capital assets are land, buildings, factories, automobiles, trucks, furniture, computers, and machines used in manufacturing. Each capital asset has an estimated useful life. The company depreciates the asset over its useful life as a way of spreading the cost of the asset across the time period in which it is used to produce revenue. This satisfies the matching principle of accounting, which states that costs and expenses should be matched to the same periods in which they are used to earn the revenue. So if a capital asset, such as a factory, costs $30 million and has a 30-year estimated life, it will be depreciated (and thus expensed) at $1 million per year. This depreciation expense will be matched against the revenue generated by the factory’s production capability.  

Companies rarely sell capital assets in the normal course of business. When a company does sell its capital assets, it’s usually because of a major change to the company’s business model, or because of bankruptcy restructuring. 

Some types of businesses have more capital assets than others. For instance, an automobile manufacturer owns a great deal of capital assets used to produce automobiles. In contrast, a large consulting firm will have few capital assets, as it deals in intellectually-based products and services. 

 

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