What Is A Capital Asset?
A capital asset is a property owned by a business that yields interest. They can be houses, machinery, vehicles, e.t.c. They are not invested in for immediate sale but used to generate more value and profit, known as capital profit. Sometimes you can also get capital loss.
“An asset is a resource held by the organization due to past events and from which future economic benefits are projected to flow to the enterprise,” according to the International Financial Reporting Standards (IFRS) framework.
Capital assets have economic values and are utilized by businesses for the sole purpose of making a profit by investing in some properties that are expected to yield profit within at least one year after being sold or exchanged.
Capital assets have the following characteristics.
- Greater than one-year anticipated usable life.
- Purchase cost surpasses the capitalization limit, which is a minimum sum set by the corporation.
- Not easily exchanged into cash.
- Not always sold as part of routine business goods and services.
Types of Capital Asset:
1. Fixed asset: These is also known as non-current assets because they are difficult to exchange or sell into cash examples are vehicles, building, lands e.t.c
2. Current assets: These types of assets are not fixed and can easily be exchanged into cash within a year, example
Capital Gain and Capital Loss
When a capital asset is sold, the increase in the value of the assets is referred to as capital gain, and it can be for the short or long term, while capital loss is the reduction in the value of an asset compared to the original price.
For capital gain, either long-term or short-term, there is a tax to be paid. The tax for long-term growth is lower than that of short-term capital gain.
Capital Assets Example
Frank bought a house, and every year it appreciates by 10% the original price. The house is regarded as a capital asset, and the 10% profit is referred to as capital gain on which there will be a tax. If the house depreciates lower than the original value, the capital asset is a capital loss.« Back to Glossary Index