Capital goods are essential for the business activities of many companies. In this lesson, you’ll learn what capital goods are and how they fit into the overall picture of a company.
What are Capital Goods?
Capital goods are goods used by businesses to produce goods and services used by consumers. Capital goods are usually considered fixed goods that are not easily converted into cash.
Capital goods are one of the three basic factors of production, which facilitate the creation of goods and services. In other words, they are the inputs you use to create outputs called products or services. The other two basic factors of production include labor and land. Unlike land and natural resources, capital goods consist of things that are created by people. You can use capital goods to help transform other goods and resources into other products or you can use them to increase the efficiency of your production process. It’s important to remember that you do not buy capital goods to sell to customers (that’s called inventory).
Long-term capital assets can usually be depreciated. Depreciation is where you expense a portion of the cost of the capital good over a period of time. Depreciation is used to offset income and can reduce tax obligations. Depreciation is reported on your profit and loss statement.
The Balance Sheet
Capital goods are reported on a company’s balance sheet as assets. Assets, as you probably know, help bring income into a company. Capital goods are typically reported as long-term assets because they generally bring income into a business after a year or more. This makes sense because most capital assets are expensive, and it will take some time to recover their costs before they start making you money.
Let’s look at a few examples of capital goods.
- Fixtures or anything attached to real property, such as cabinets
Let’s review. Capital goods are one of the three basic factors of production in business. They are purchased and used to help your company produce consumer goods or provide services. They are reported as assets on a company’s balance sheet and often can be depreciated over time. Examples of capital goods include buildings, machines, equipment, furniture and fixtures.