Businesses and Capital Assets

A capital asset is often owned for its contribution to the ability of the business to make a profit. Additionally, it is anticipated that the asset's advantages will last longer than a year. On a business's balance sheet, capital assets are represented by the property, plant, and equipment

Examples of PP&E include land, buildings, and machinery. These assets may be liquidated in worst-case scenarios, such as if a company is restructuring or declares bankruptcy. In other cases, a business disposes of capital assets if the business is growing and needs something better. For example, a business may sell one property and buy a larger one in a better location.

Capital assets may be disposed of by businesses through sales, exchanges, abandonment, or loss through foreclosure. Condemnation can occasionally be considered a disposition as well. The majority of the time, when a business sells an asset that it has owned for more than a year, it will experience a capital gain or loss. The IRS does, however, occasionally classify the gain as normal income.

Also possible are damage or obsolescence of capital assets. When an asset is impaired, its fair value drops, causing the book value on the balance sheet to change. Additionally, a loss will be recorded on the income statement. If the carrying amount is higher than the recoverable amount, a period-based impairment charge equal to the discrepancy is recorded. No impairment is recognised if the carrying amount is lower than the recoverable amount.