A capital asset is a significant piece of property such as a home, car, investment property, stock or bond, or even collectibles or art.
Capital assets are assets with a useful life longer than a year and not intended for sale as part of a business's regular operations. They are also considered production costs. A computer purchased by a company for use in its office would be a capital asset. The same computer would be considered inventory if it were purchased by another company to sell.
The main purpose of owning a capital asset is to contribute to the business's profitability. The benefits of the asset are expected to extend beyond a one-year period. The property, plant, and equipment (PP&E) portion of a business's balance sheet represents capital assets.
Land, buildings, and machinery are common examples of PP&E. In worst-case scenarios, such as a restructuring or bankruptcy, these assets may be liquidated. When a business is growing and needs something better, it may dispose of capital assets. One example is when a business sells one property and buys another larger one in a better location.
The disposal of capital assets can take place through the sale, trade, abandonment, or foreclosure of the assets. Condemnation can also be considered as disposal. Most of the time, when a business owns an asset for more than a year, it incurs a capital gain or loss when it sells it. Sometimes, however, the IRS treats the gain as regular income.
The fair value of an asset decreases when it is impaired, which leads to an adjustment in the book value of the asset on the balance sheet. The income statement will also show a loss. As an impairment expense, the difference between the carrying amount and the recoverable amount is recognized in the period. If the carrying amount is less than the recoverable amount, no impairment is recognized.