What is a capital asset?
Definition of a capital asset
A capital asset is an asset that will be useful to your business over a long period of time (usually more than two years) and costs more than your usual day-to-day running costs. A capital asset could be a piece of equipment, or an investment.
Capital assets are also called 'fixed assets'.
Capital assets can be either "tangible" or "intangible", depending on whether you can see and touch them.
Examples of capital assets
- A computer for most businesses (tangible)
- A camera for a professional photographer (tangible)
- A patent for a software company (intangible)
- A high-value domain name (intangible)
Capital assets and depreciation
The capital asset's value is spread across the time it's going to be used in your business, which is called its "useful life". A proportion of the asset's value is shown as a day-to-day running cost, reducing your business's profit, for each year it'll be useful to the business. This is called "depreciation" for a tangible asset, or "amortisation" for an intangible asset.
Frequently Asked Questions
Is there a set cost at which an item becomes a capital asset?
There is no fixed cost at which an item becomes a capital asset rather than a consumable item - it depends on your business’s size. For example, a £200 computer might be a capital asset in a very small business but would probably be a consumable item in a big blue chip company. However, items like batteries, cables and memory sticks would almost always be consumables. If you’re not sure whether an item is a capital asset, you should speak to your accountant.
Got questions? Ask Emily!
FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.