Capital equipment
Encyclopedia of Business Terms and Methods, ISBN 978-1-929500-10-9. Copyright © 2011 by Marty J.Schmidt. Revised 14 January 2012.
The Meaning of Capital Equipment
Capital equipment includes those long-lasting goods acquired and owned by a company or organization that are not consumed in the normal course of business — goods such as machinery, trucks, large computers, office furniture, etc. Capital equipment is expected to provide operating benefits over a long period of time, usually several years or more. Such items are usually classified as capital assets.
Most organizations established criteria for designating acquired items as either capital or non capital items. These criteria result partly from local tax laws, but they also represent accounting policy choices by the organization's management. Such criteria typically specify that capital items must have a minimum useful life or economic life (e.g., one year or more), come with an acquisition cost above a certain threshold (e.g., $1,000 or more), and demonstrably contribute value to the organization's business.
In business, capital equipment goods (capital assets) are also distinguished from non capital items in several other important ways:
- Capital vs. Non Capital Items: Method of Acquisition
The acquisition of most capital equipment items is planned, managed, and funded on an organization-wide basis. Capital acquisition choices are usually decided by a committee, such as a Capital Review Committee, that receives and prioritizes capital funding requests. Authorization for acquisition and funding is granted for highest priority proposals first, continuing through lower priority proposals, until the capital spending ceiling for the current capital budgeting cycle is reached.
Acquisitions of non-capital items, by contrast, is typically initiated and authorized by many different individual managers at different levels.
- Capital vs. Non Capital Items: Budgeting and Planning
Capital equipment is usually purchased through capital expenditures (CAPEX), funded by the organization's capital budget, which is separate and distinct from the organization's operating budget for non capital expenditures (OPEX).
Capital spending and non capital spending, that is, are funded by different budgets and may be authorized by different managers using different decision criteria. For this reason, proposals for projects, programs, initiatives, acquisitions, or other costly management actions, need to specify separately their requirements for capital funding and operating budget expense spending.
- Capital vs. Non Capital Items: Management and Evaluation
Capital equipment assets are more likely than non capital goods to be managed through an asset life cycle management process. This means that capital assets such as vehicles, machinery, laboratory equipment, computer systems, or furniture, are viewed as having an economic life of a certain number of years, that is, a period of time during which the asset returns value to the company greater than its costs (cost to acquire, cost to maintain, cost to operate).
Capital equipment assets are expected to justify their acquisition and existence throughout their economic life. Good management of capital equipment will assess asset performance periodically, with profitability metrics and investment financial metrics such as return on investment (ROI), return on assets (ROA), and return on capital employed (ROCE). Under-performing assets may become targets for efforts designed to improve asset utilization, or they may become targets for replacement or liquidation.
- Capital vs. Non Capital Items: Valuing and Reporting
Capital equipment assets (such as factory machinery) will be valued and reported on the balance sheet in a manner different from the treatment of non capital assets (such as accounts receivable or office supplies). For instance, capital equipment assets in particular have a reported book value on the balance sheet that can change during asset life due to (a) depreciation expense accumulated and charged against asset book value, or (b) certain kinds of value adjustments permitted or required under local tax laws and Generally Accepted Accounting Principles (GAAP).
Capital equipment assets, incidentally, may appear on the balance sheet in a category of their own (Capital Assets), but they may also appear in asset account categories such as Tangible Assets, Long-Term Assets, or Property Plant & Equipment, Or, the organization's accountants may choose to list and report capital equipment under asset categories named for the nature or use of the asset (such as Computer Equipment, Manufacturing Equipment, or Store Assets).
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