Capital Equipment Example | Types | Definition 2021:-
Capital equipment is an article of nonexpendable, tangible property with functional life of more than one year, and an acquisition cost of $5,000 or more per unit. The $5,000 value threshold includes:
- The item itself
- Expenditures necessary to put the item in place; and
- Ancillary charges such as taxes, duty, protective in-transit insurance, freight, and installation costs.
For example, the capital expenditure for a piece of equipment includes the cost of any modifications, attachments, accessories, and auxiliary apparatus necessary to make it usable, as well as the cost of shipping and installation.
What is Capital Equipments
Capital equipment refers to the as one of the subclass fixed asset categories that include manufacturing and office machinery and tools. It also includes transportation equipment, furniture, and other equipment, these items are properly chargeable to a capital account rather than to expense. Capital Equipment
Capital equipment is physical items such as office machinery and tools, transportation equipment, and also furniture acquired for productive activity. Companies are frequently investing in these items to expand their operations or to keep up with new techniques or technological advances. From an accounting point of view, they are normally recorded as fixed assets, but in order to be classified as such, according to U.S. accounting rules, they must be worth more than $5,000 and have an expected life span of more than 1 year. Some industries spend much more than others when it comes to capital equipment.
Capital intensive businesses such as airlines are an example of this, since most of their business comes from the operation of aircraft (equipment) the level of capital equipment investments is frequently higher than in other manufacturing industries. On the other hand, manufacturing businesses are also more capital intensive than service businesses. An example of these items would be machinery, trucks, lifting systems, inventory transportation equipment, or warehouse racks, among others.
There is a company named is Plastic Pipes Co. that manufactures water pipes for the construction and domestic market. Currently, the company’s Board of Directors is reviewing next year’s investment plan. The plan contemplates a total investment of $5,400,000 that will be divided between the following programs: $1,400,000 for the construction of a new building, $2,000,000 for capital equipment, $1,500,000 for stock investments, and $500,000 for new cafeteria facilities for employees.
The capital equipment investment contemplates the acquisition of new machinery to set up 3 new lines of productions, the purchase of new packaging equipment, and modernization of the raw material warehouse. The company expects that this investment program increases its earnings per share by 50% for the next fiscal year.
Types of Capital Equipment
Capital equipment often represents large items a company installs in its facilities for operating purposes. The different categories for these items include furnishings, machines, apparatus, or supplies used for business purposes. Accounting departments are often accountable for handling the purchase, receipt, and setup of these items in a company. Proper accounting for capital equipment is necessary in order to report the use of cash or debit and acquirement of assets. These assets appear on the balance sheet and alter a company’s net worth.
Furnishings as capital equipment are any large purchase of items used in a normal office environment. Included in this category are desks, cubicles, chairs, couches, or similar items a company would use on an almost daily basis. Other items may be in this group depending on how a company defines furnishings. The amount for purchasing these items is also dependent on the company. For example, office furnishings over a certain dollar level are assets, while those purchases below the level are immediate expenses.
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