when a business purchases capital assets the internal revenue service irs considers the purchase a capital expense in most cases businesses can deduct expenses incurred during a tax year from their revenue collected during the same tax year and report the difference as their business income however most capital expenses cannot be claimed in the year of purchase but instead must be capitalized as an asset and written off to expense incrementally over a number of years 45
depreciation of capital assetsusing depreciation a business expenses a portion of the asset s value over each year of its useful life instead of allocating the entire expense to the year in which the asset is purchased 6 the purpose of depreciating an asset over time is to align the cost of the asset to the same year as the revenue generated by the asset in line with the matching principle of u s generally accepted accounting principles gaap this means that each year that the equipment or machinery is put to use the cost associated with using up the asset is recorded in effect capital assets lose value as they age the rate at which a company chooses to depreciate its assets may result in a book value that differs from the current market value of the assets capital assets vs ordinary assetan ordinary asset is an item that holds future economic value to a company or individual and that future economic benefit is expected to be used within the next year for example cash is an ordinary asset because it used to operate a business every day other examples of ordinary assets include inventory prepaids and account receivables the distinction between capital assets and ordinary assets is usually the timeframe in which the asset is going to be a used a business may be used over decades so it is a capital asset inventory is bought and sold as part of the normal course of business so it is an ordinary asset capital assets are usually classified as long term assets on the balance sheet whereas ordinary assets are usually classified as short term capital asset vs fixed assetin accounting a fixed asset is a type of capital asset that is tangible that a company intends to use for more than one year a fixed asset is usually a building or ppe that is depreciated over time the difference between the two is that capital assets is a more expansive collection of assets a capital asset may refer to any company asset with a useful life greater than one year that is not meant to be bought or sold as part of the normal course of action of business although capital assets may primarily be fixed assets capital assets may also include non fixed assets such as property held for investment like stocks and bonds for personal gain 