CAPITAL ASSET

Saturday Brain Storming Thought (172) 20/05/2023

CAPITAL ASSET

Capital assets are tangible and generally illiquid property which a business intends to use to generate revenue and expects its usefulness to exceed one year

On a balance sheet, capital assets are represented as property, plant and equipment (PP&E)

Examples include land, buildings and machinery

Why is capital an asset?

Capital is used to create wealth for the business, therefore it is classified as an asset in accounting

Non-Capital asset

An asset is considered as Non-Capital asset if it has a usable life of at least one year and does not affect a business’s primary money making operations

Types of capital assets

1) Financial

2) Natural

3) Produced

4) Human

5) Social

All are stocks that have the capacity to produce flows of economically desirable outputs

Capital assets are also called as fixed assets

Long term Capital Asset

Capital asset that held for more than 36 months or 24 months or 12 months, as the case may be, immediately preceding the date of transfer is treated as long term Capital Asset

1) security listed on recognised stock exchange, units of UTI (Unit Trust of India), units of equity oriented fund, zero coupon bond – 12 months

2) unlisted shares, immovable property (land or building or both) – 24 months

3) any other capital asset – 36 months

Short term Capital Asset

Unlisted shares and immovable property like land, building, residential or commercial property held for not more than 24 months immediately prior to the date of transfer will be treated as short term Capital Asset

Capital Assets definition

1) House

2) Land

3) Security

4) Machinary

5) Vehicle

6) Trademark and Patent

7) Leasehold rights

Having relation or right in any Indian Company is also considered as capital asset

Tax Exemption on Capital Gains as per Income tax Act

1) Section 54 –

The capital gains earned by transferring the ownership of the property is liable for tax exemption undercondition that the capital gains used to purchase the second property should be done within 2 years

Section 54F –

One can claim an exemption under this section when capital gains are earned on long term assets excluding residential properties

Section 54EC –

Under this section, exemptions can be claimed if the amount earned by selling a property invested into specific bonds from where capital gains are earned

Capital in class 11 accounting

Amount invested by owner or partners in the business in form of cash or assets having some monetary value

Capital

Capital isa broad term for anything that gives its owner value or advantage

Consumption goods

1) The goods that are used by the consumers and have no use in future

2) goods are purchased in order to fulfill personal consumption needs

3) Target market is consumer

4) consumption goods have high demand

5) pricing of consumption goods are comparatively cheap

Capital Goods

1) The goods that have a future use and are used for production of consumption goods

2) capital goods are purchased for manufacturing of consumption goods

3) Target market is for manufacturers

4) demand for capital goods is comparatively less

5) Pricing are costlier in comparison to consumption goods

Assets which excluded from capital asset

Any stocks in trade, consumable stores or raw materials held for the purpose of business or profession have been excluded from the definition of capital assets

Any movable property (excluding jewellery made out of gold, silver, precious stones, drawings, paintings, sculptures, archeological collections etc)

Key Takeaways of Capital Asset

1) Capital assets are assets that are used in a company’s business operations to generate revenue over the course of more than one year

2) they are often recorded as an asset on the balance sheet and expensed over the useful life of the asset through a process called depreciation

3) expensing the asset over the course of its useful life helps to match the cost of the asset with the revenue it generated over the same time period

4) capital assets may be tangible or intangible, though most capital assets are related to buildings, land or FFE

5) Capital assets are different than ordinary assets, useful in the long term whereas ordinary assets primary value is in the day to day operations of the company

Capital Gain Tax

Any profit or gain that arises from the sale of a capital asset is known as income from capital gains

Such capital gains are taxable in the year in which the transfer of the capital asset takes place

This is called as capital gain tax

Capital Assets for the Government

All government facilities, infrastructure and equipment that help deliver public services are capital assets for government

All these are important to improve the economic and social welfare of citizens and improve their standard of life

Risks associated with capital assets

1) scope of human error while calculating or recording their value

2) loss of value due to depreciation

3) risks of theft

Cost of improvement (COI) is zero for