Capital asset

Capital asset is a term used in the field of finance and accounting to describe an asset that is expected to generate value over a long period of time. Capital assets are typically significant in value and are not easily converted into cash. They are often used by businesses to generate revenue, increase their value, or improve their operations.

Definition

A capital asset is defined as a significant piece of property such as a house, car, investment property, stocks, bonds, or land. These assets are significant because they can be used to generate wealth, either through appreciation, rental income, or capital gains. They are not intended to be sold within the normal course of business.

Types of Capital Assets

Capital assets can be categorized into two main types: tangible and intangible assets.

Tangible Assets

Tangible assets are physical assets that have a finite monetary value and can be physically touched. Examples of tangible assets include buildings, machinery, vehicles, and inventory.

Intangible Assets

Intangible assets, on the other hand, are non-physical assets that have a monetary value. Examples of intangible assets include patents, copyrights, trademarks, business methodologies, goodwill, and brand recognition.

Capital Asset Pricing Model (CAPM)

The Capital Asset Pricing Model (CAPM) is a model that describes the relationship between the expected return of a security and its risk. The model is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio.

Depreciation

Over time, the value of capital assets can decrease due to wear and tear, obsolescence, or age. This decrease in value is known as depreciation. Businesses often account for depreciation when they prepare their financial statements, reducing the value of their assets to reflect their decreased worth.

Capital Gains and Losses

When a capital asset is sold, the difference between the purchase price and the sale price is known as a capital gain or loss. If the asset is sold for more than it was purchased for, the result is a capital gain. If it is sold for less, the result is a capital loss.

See Also

• Investment
• Asset management
• Fixed asset
• Current asset