Question

What is a capital asset? What factors affect the determination of whether an asset is classified as a capital asset?

Answer 1

CAPITAL ASSET

- MEANING OF CAPITAL ASSET

An asset that the owner intends to hold, and derive it's benefit for a long period, say more than one year. These are the assets ,used in a company's business operations to generate revenue over long period. They are usually recorded as the asset on balancesheet, and expensed over the useful life of the asset through depreciation process. Capital assets include, long term investments made on land, building, equipments etc.

- FACTORS AFFECTING THE CAPITAL NATURE OF ASSET

• Recurring nature of expenditure : When the expenditure incurred on the purchase is non-recurring in nature, such assets, so purchased will be treated as capital asset & the expenditure so incurred will be capital expenditure.
• Benefits arising out of the asset : When the owner holds the asset and it's benefit derived for long period, it will be treated as capital asset.   
• Life of asset : Yet another factor for the determination of capital nature of asset is it's usefulness of life. A capital asset is an asset, with an useful life longer than a year, and is not intended for sale in the regular course of the business operations.   
• Role of asset : Capital assets are generally owned owned for it's role in contributing to the business's ability to generate profit, and benefits arived form such assets will expand beyond a time span of one year.