Capital Asset can not be realized as cash so easily, since it is a tangible property. Capital Asset can be held for a period more than over a year. Some examples of Capital Asset is real estate, machinery, and land as these assets cannot easily be converted into cash. In fact, it is a piece of property or equipment that creates more property. As an example, a factory can create products for the business to sell and a factory can include land, machines, and buildings.
All companies have made an investment in a capital asset. Some of the companies may require large assets such as building, land and heavy machinery, while others may require certain franchise rights, computer equipment, or software programs. There are different tax laws for Capital assets, which is different than short-term assets. Please remember that a company is unable to deduct the complete amount spent on the asset in the same year when it was purchased. If we allow this, then the company’s earnings would be severely understated in the same year when the asset was purchased and overstated in the following years after the purchase. As far as theory is concerned, the cost of the asset would be deducted over many numbers of years of the useful life of the asset.
