What is Capital Equipment?
Capital equipment is generally defined as an asset with an acquisition cost that exceeds a set amount. To be a capital asset, the item must also have a lifespan of more than a year. The items typically are also required to perform or assist in producing a product, selling a product, or providing a service. Different institutions and companies may adjust the definition and acquisition costs to fit meet their needs.
This type of equipment can include items acquired in a number of ways, and they can be purchased, leased, or donated. There are some items that may appear to meet the general requirements but are generally excluded from the category, such as land and software. Items that are included vary from industry to industry and business to business. In educational facilities, capital equipment may include computers, X-ray machines, and microscopes. In the mining industry, items in this category could include drills, sifters, or cargo containers.
Record maintenance is generally considered an important part of capital equipment accountability procedures. In the US, records are used to ensure that federal regulations regarding the assets are met. Accurate inventory is one type of paperwork that the government generally requires. For this reason and due to possible tax implications, disposing of the equipment is often a matter of strict procedure.
Many of the items in this category can cost tens of thousands or millions of US Dollars (USD). To maintain warranties and to qualify for insurance, paperwork for the assets must usually be available and up-to-date. Records are also important to assess performance and to calculate cost versus value.
Capital equipment can have a negative or positive effect on a company’s profits. If too much money is spent acquiring and maintaining these items, then profits can be reduced. Items listed in this category are often essential to the execution of a company’s business, and it is usually a good idea for companies to consider more than price when considering which equipment they will obtain. Factors such as capacity and durability should also weigh heavily, otherwise excessive losses could occur.
If quality equipment is obtained and used efficiently, these assets can drastically boost profits. Fewer repairs and less maintenance can prevent losses from situations such as idled production. When equipment is kept and used for longer periods instead of being upgraded for newer versions, it is also likely to add to profits, as long as it is still operating up to par.
It's interesting to see how the definition of capital equipment varies from one business to another. This article says that land and software generally aren't considered capital equipment. I had always thought that while land definitely wouldn't be considered capital equipment because it's not movable, software may be considered capital equipment depending on the business. The best way to find out what would be considered capital equipment for a particular situation though, would be to consult a professional.
As a photographer and owner of my own studio I can understand the significant impact of capital equipment cost to a profit margin.
My cameras, lenses and lights all add up to be very hefty expenses but the value that I get back from them is very much so worth it.
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