I thought a good way to start the year is to get back to some accounting basics. So this video is going to answer the question, What are capital assets? Watch now!
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Capital assets do not get the attention they deserve. Have you ever seen a group of friends when there is one friend that is the odd-man-out? There is one person that is sitting over in a corner by themselves, while the rest of their friends are hanging out, partying, and having a good time. That person sitting in the corner is like capital assets. In the accounting world, capital assets is not something you deal with in day-to-day operations, so all too often, you sit them over there in the corner and forget about them. I am going to tell you why you need to pay more attention to your capital assets and why they are so important.
To start, what are capital assets? For most companies, capital assets is the biggest asset on your balance sheet. So let us do a quick balance sheet check. On your balance sheet, you have a bunch of different assets listed in order of liquidity. Cash, investments, accounts receivable, prepaid expenses, inventory, and all the way at the bottom is capital assets.
Quick tip: What is liquidity? Liquidity describes how quickly you can turn these items into cash. So when you go down the list, it becomes harder and harder to sell the items and turn them into cash. Capital assets usually take the longest to sell, and so they are at the bottom of the list.
For most companies, the majority of the money on their Balance sheet is sitting in Capital assets. Compared to the other categories, it is not even close. So let me ask you a question. Do you like money? Of course you like money. We are all business people here. We all like money. Well, all the money is sitting in capital assets.
So we spend most of our time worrying about operations, but in comparison, usually operations is a small amount of money compared to capital assets. So it is very important you have a thorough understanding of what is going on with your capital assets, because that is where the money is at.
So what is Capital assets? Very simply, capital assets are:
- Expensive purchases
- Kept for longer than one year
- Furniture & Fixtures
These are the big purchases your company is going to make. Examples include if you were to build a new factory, or buy a large piece of equipment. Those dollar amounts would appear under capital assets on your balance sheet.
Sounds simple? Guess what, there is a catch. You are going to keep these items for longer than one year, but you are going to produce a balance sheet every year. So every year, accountants do two things:
- Inventory of capital assets
- Calculate depreciation
So what you see on the balance sheet is the original cost of the assets, minus accumulated depreciation, to get net capital assets, which is the value you are carrying on your Balance sheet.
So couple of closing thoughts. First, capital assets represent real money. A LOT of money. And second, this is affecting the value of your company on your balance sheet. So it is important to always have a good understanding of what is going on with your capital assets.
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Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.