Has your accountant talked about capital assets yet? Many business owners own important capital assets but may not fully understand how these affect the business's finances. To help you maximize the utilization of your capital asses and minimize expenses, here are a few key things to know about this concept.
What Is a Capital Asset?
A business has many different types of assets, which are generally divided into two categories: capital and ordinary. Ordinary assets are small, everyday purchases that have value but are not expected to last very long and which are relatively inexpensive. They also include inventory, which is held for sale and therefore should be treated differently in the long run.
A capital asset is a long-term asset expected to last more than a year and over a company-set threshold of cost. These assets are major purchases and add or take away from the company's value on a much larger scale. Capital assets can be tangible (such as heavy equipment or computers) or they can be intangible, like copyrights or patents.
What Are the Financial Benefits of Capital Assets?
Capital assets add to the company's profits in several ways. First, they are a positive on the company's financial statements. A capital asset without a lot of corresponding debt makes your balance sheet more positive, improving its appearance to lenders.
A capital asset is also depreciated over its useful life, meaning that a portion of its cost is usually deducted from income taxes each year. This deduction helps reduce the company tax bill regularly through the course of its life.
Finally, a capital asset's purpose is to help the company do business, contributing to its profit margin. A new office building, for instance, should help improve efficiency, build a good reputation in the community, and use technology better. Upgraded production software should likewise improve the efficient use of assets or inventory management.
How Can You Ensure the Best Use of a Capital Asset?
As with any portion of the business, an owner should know how to strategize the use of capital assets. Once the asset is fully depreciated, for instance, it adds no further value as a deduction. An aging asset, then, should be assessed as to whether it continues to add enough value to the business or is more trouble than it's worth.
You can also usually choose how to use depreciation to the company's advantage on taxes. Deprecation choices often include regular depreciation, accelerated depreciation, and different depreciation schedules.
To determine if you are making the best use of your capital assets, work with an accounting service. They can help you plan for current assets as well as those you plan to buy down the road. Learn more by making an appointment today.
Share9 July 2020
I have always dreamed of opening my own beauty salon, but never seemed to have the money to make that dream come true. I decided that it was time for me to hire an accountant to help me create a savings plan and to assist me in calculating how much money I would need to open my salon. I found out all about what it takes to start a business and a lot of great advice about what I can do to save the money I need to make it happen. If owning your own business is something you are dreaming of, my blog can help.