The Capital Assets, also called capital goods or equipment, are all appliances, buildings, and facilities used to produce, along with other factors of production, other goods, and services.
Equipment or machinery is a durable asset and is generally used for a long period of time. They are physical goods that require the use of materials for processing.
What are Capital Assets?
The goods are part of the assets of the company and with them, the production process is carried out. That is, they are all the materials that are needed to manufacture and offer the products or services which are transformed into a consumer good that you will then sell to the public.
These goods, like any material object, suffer some type of decay over time and their replacement or repair becomes necessary. The cost of such replacements or repairs represent an essential expense for the good development of the business, that is, for the production of goods and services.
Generally, these expenses return to the company because they are elements whose purpose is to continue the profit process, which also helps to increase their financial capital. Capital Assets are compatible with fixed assets as it is recognized as an asset that generates more assets.
Differences between Capital Assets and intermediate Assets
Several factors are involved in the production process. They are Capital Assets, intermediate Assets (raw material) and labor, which are considered primary production factors. Both types of goods, equipment, and intermediates are present in all production processes.
The duration of a good or equipment does not depend on the production cycles, therefore, its lifetime is longer. That is, they can be used in several processes. Instead, intermediate assets are transformed during it to be converted into consumer goods, generally to meet some type of need. Therefore, its duration is different and different.
Capital assets are intended to follow the production process either as auxiliaries or directly to increase the financial capital of the company. On the contrary, intermediate assets are always transformed into consumer goods.
Characteristics of capital assets
- You must use them in combination with other production factors.
- Take into account its quantitative capacity, that is, the technical limits of the goods or equipment.
- Consider also their qualitative capacity, that is, the quality and characteristic of the products produced.
- Once installed they will serve for a number of years and not just for a productive cycle.
- You must keep in mind that the equipment is depreciated by the time of use or by the appearance of new technologies.
Role of capital assets
They are an important part of the production process and belong to what is known as “physical capital.” This, together with human capital, is what sets in motion the process of accumulation of wealth.
They are essential in the accumulation of capital for the production of goods and services. Companies invest in this process so that the appropriate means are guaranteed for the development of their activities.
The production of goods is an unequivocal sign of economic development. This production reveals that there is the possibility of having its own technology that allows producing manufactured goods with a higher added value than raw materials.
The activity of manufacturing goods or products with added value, in addition to generating large volumes of employment and investment, is often accompanied by the development of a strong financial sector to support its activities in addition to other auxiliary services.
Classification of goods and services
- Capital assets. They are goods that are used to manufacture other goods and services. That is, they are goods already produced by the man that is used for the production of other goods and services.
- Intermediate assets. They are those that are transformed by companies into commercial products. That is, it is the raw material that, when transformed, other consumer or capital goods are obtained.
- Consumer assets. They are goods that have been transformed for final consumption and are aimed at directly satisfying the needs of consumers. That is, the immediate satisfaction of a need is obtained.
Importance of capital assets
These goods are usually considered as a pillar of the productive system in most developed countries. They are produced by man and are used in the manufacture of other goods and services.
In companies that operate internationally, capital assets or products are all expenses that are incurred while they are operating in that market. For example, the maintenance of offices such as rental income, stationery, employee uniforms, among others.
Remember that to develop economic activity and produce goods and services that meet our needs, it is essential to meet some basic elements, such as resources and production factors.
That implies the need to know the real amounts of economic goods that are technically needed for the formation of a new product.
Capital assets are physical goods that come from nature and are produced in a company and converted, by others, into consumer goods or services. Both types, capital and consumption, ultimately seek to satisfy a human need.
Finally, remember that capital assets (facilities, machinery, tools, etc.) are well used by a company or business to help another business produce consumer goods. These consumer goods (food, appliances, clothes, cars, among others) have no future productivity once they are used by consumers.
Capital assets are important to increase the productive capacity of the economy in the long term. The more capital goods you have, the short-term consumption is reduced, but, at the same time, this can lead to better or higher standards of living in the economy.