Capital asset is a tangible property that cannot easily be converted into cash and that is typically held for a long period of time, generally over a year. Some examples would be real estate, machinery, and land since these types of assets cannot easily be converted into cash. Typically it is a piece of equipment or property that creates more property. For example, a factory can create products for the business to sell and a factory can include land, machines, and buildings.
Almost every company has made an investment in a capital asset. Some companies may require large assets such as land, building, and heavy machinery, while others may require certain franchise rights, computer equipment, or software programs. Capital assets are subject to different tax laws than short-term assets. It is important to remember that a company is unable to deduct the entire amount spent on the asset in the same year it was purchased. If this were allowed, then the company’s earnings would be severely understated in the year that the asset was purchased and overstated in the following years after the purchase.
In theory, the cost of the asset would be deducted over the number of years of the useful life of the asset. This would correspond to the decrease in the value of the asset for each year. At the end of the asset’s useful life, any portion of the value remaining in the asset would represent its salvage value. The asset can then be sold or scrapped