Capital asset
Encyclopedia
The term capital asset has three unrelated technical definitions, and is also used in a variety of non-technical ways.
textbook advises that the term be avoided except in tax accounting
because it is used in so many different senses, not all of them well-defined. For example it is often used as a synonym for fixed assets or for investments in securities
.
A common non-technical usage occurs when people ask that employees or the environment or something else be treated as a capital asset. In this context it means something managers have a responsibility to maintain, and to report changes in value as gains or losses.
Capital assets should not be confused with the capital
a financial institution is required to hold. This capital
is computed from the right-hand side of the balance sheet
while asset
s are found on the left-hand side.
- In financial economicsFinancial economicsFinancial Economics is the branch of economics concerned with "the allocation and deployment of economic resources, both spatially and across time, in an uncertain environment"....
, it refers to any assetAssetIn financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
used to make money, as opposed to assetAssetIn financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
s used for personal enjoyment or consumption. This is an important distinction because two people can disagree sharply about the value of personal assetAssetIn financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
s, one person might think a sports car is more valuable than a pickup truck, another person might have the opposite taste. But if an assetAssetIn financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
is held for the purpose of making money, taste has nothing to do with it, only differences of opinion about how much money the assetAssetIn financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
will produce. With the further assumption that people agree on the probability distribution of future cash flows, it is possible to have an objective Capital asset pricing modelCapital asset pricing modelIn finance, the capital asset pricing 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, given that asset's non-diversifiable risk...
. Even without the assumption of agreement, it is possible to set rational limits on capital asset value. - In governmental accounting, it is defined as any assetAssetIn financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
used in operations with an initial useful life extending beyond one reporting period. Generally, government managers have a "stewardship" duty to maintain capital assets under their control. See International Public Sector Accounting StandardsInternational Public Sector Accounting StandardsInternational Public Sector Accounting Standards are a set of accounting standards issued by the IPSAS Board for use by public sector entities around the world in the preparation of financial statements...
for details. - In some income tax systems, gains and losses from capital assets are treated differently than other incomeCapital gains taxA capital gains tax is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property...
. Sale of non-capital assets, such as inventory or stock of goods held for sale, generally is taxed in the same manner as other income. Capital assets generally include those assets outside the daily scope of business operations, such as investment or personal assets. The United States system defines a capital asset by exclusion. Capital assets include all assets except inventory of supplies or property held for sale (including subdivided real estate), depreciable property used in a business, accounts or notes receivable, certain commodities derivatives and hedging items, and certain copyrights and similar property held by the creator of the property. The United Kingdom has an even broader definition.
Non-technical and ambiguous usage
A well-known financial accountingFinancial accountancy
Financial accountancy is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders...
textbook advises that the term be avoided except in tax accounting
Tax accounting in the United States
U.S. tax accounting refers to accounting for tax purposes in the United States. Unlike most countries, the United States has a comprehensive set of accounting principles for tax purposes, prescribed by tax law, which are separate and distinct from Generally Accepted Accounting Principles.- Basic...
because it is used in so many different senses, not all of them well-defined. For example it is often used as a synonym for fixed assets or for investments in securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
.
A common non-technical usage occurs when people ask that employees or the environment or something else be treated as a capital asset. In this context it means something managers have a responsibility to maintain, and to report changes in value as gains or losses.
Capital assets should not be confused with the capital
Capital requirement
Capital requirement refers to -The standardized requirements in place for banks and other depository institutions, which determines how much capital is required to be held for a certain level of assets through regulatory agencies such as the Bank for International Settlements, Federal Deposit...
a financial institution is required to hold. This capital
Capital requirement
Capital requirement refers to -The standardized requirements in place for banks and other depository institutions, which determines how much capital is required to be held for a certain level of assets through regulatory agencies such as the Bank for International Settlements, Federal Deposit...
is computed from the right-hand side of the balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
while asset
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
s are found on the left-hand side.