There are two schools of thought when it comes to determining whether to buy and register capital equipment on your books. The first option is to buy and install the necessary equipment at a time throughout the year when increased demand merits it, ensuring adequate cash flow to cover additional loan payments or the outright purchase of the equipment.
The second way is to purchase and install the equipment before the start of the business year or when you’ll really need it, giving time for training and problem fixes before going into full production.
What Is Capital Equipment?
Physical things bought for productive activity are referred to as capital equipment. These products are commonly purchased by businesses in order to grow their operations or stay up with new techniques or technological advancements.
Capital equipment has a useful life of more than one year and is employed in a company’s productive activities. It’s a financial commitment made by a corporation to continue or expand its manufacturing operations.
Example Of Capital Equipment
Plastic Pipes Co. is a manufacturer of water pipes for the building and residential markets. The company’s Board of Directors is now examining the investment strategy for the coming year. The plan calls for a total investment of $5,400,000, which will be split among the following programmes: $1,400,000 for a new building, $2,000,000 for capital equipment, $1,500,000 for stock investments, and $500,000 for new staff dining facilities.
The capital equipment investment includes the purchase of new machinery to establish three new production lines, as well as the procurement of new packaging equipment and the renovation of the raw material storage. This investment program is expected to boost the company’s profits per share by 50% in the coming fiscal year.
Types of Capital Equipment
1. Fixed Capital Equipment (FCE)
- A building’s capital equipment is permanently linked to it.
- FCE has a useful life of more than two years and costs $5,000 or more to acquire.
- The FCE’s removal would have a significant impact on the building’s worth.
- Fixed capital equipment is regarded as a part of the building and an enhancement to the building.
- Fixed capital equipment isn’t given an inventory number and hence isn’t recorded in inventory records.
Heating and electrical equipment, plumbing fixtures, built-in shelving and cupboards, and inlaid carpets are examples of permanent capital equipment.
2. Movable Capital Equipment (MCE)
- Capital equipment that is not permanently linked to a building or structure is referred to as movable capital equipment.
- The environment in which mobile capital equipment operates is not an important element of its design. Its removal has no effect on the item’s worth or the value of the real estate.
- MCE items have inventory numbers assigned to them and are kept in the Generalized Inventory file. Any change in status, such as moving, selling, surprising, stealing, trading-in, and so forth, must be notified to Purchasing.
Movable capital equipment is further defined as stationary or portable.
3. Stationary Capital Equipment (SCE)
- Because of their size and/or use, several pieces of transportable capital equipment are typically stored in the same place.
- These objects are categorized as stationary, and their positions are recorded in the inventory record permanently.
4. Portable Capital Equipment (PCE)
- Because of their size, usage, or application, many pieces of moveable capital equipment are continually relocated from one location to another.
- Dictating machines, audio-visual equipment, test meters, and other items are examples.
- This category includes items that are referred to as portable capital equipment.
- A “home” location must be set to PCE. A record of the PCE’s present location, including the name of the person to whom it is provided, should be preserved at the “home” location. Home locations must also be notified to Purchasing so that inventory data may be updated.
Attributes Of Capital Equipments
1. Acquisition Cost
For capital acquisitions, each facility or practice will have a defined cost barrier. This may cost as little as $500 or as much as $5000, depending on the size of your practice, and is actually decided by the administrative procedure of the facility. A small clinic with fewer assets may afford to deal with lower criteria since it has more time.
The price of the equipment and additional costs associated with the sale, such as shipping and setup, are included in acquisition expenses. Items like printers, keyboards, and software might be included in the cost of purchases with peripherals, such as computers.
2. Not Disposable or Consumable
Capital expenditures cannot be decided only on the basis of cost. Consumables, by definition, are goods that are used up fast. Some healthcare expenditures may reach the cost criterion, but they may not qualify as capital if they are acquired to be utilized, or “consumed.”
Capital equipment is a type of asset that should be identified and inventoried as such, as well as being subject to depreciation.
3. Stand Alone
Even if a big component acquisition meets both the cost and non-consumable criteria, it may not be considered capital equipment on its own. The term “stand-alone” refers to an item that may be utilized on its own. Understanding this feature can assist you in appropriately grouping components so that they may be priced and documented with the major capital equipment if necessary.
Keep in mind, however, that your procurement process may allow you to add value or prolong the life of an existing piece of capital equipment by purchasing subsequent components such as capital equipment. The value of the sponsored equipment might be increased by the subsequent purchase.
4. Useful Life of One Year or More
A basic definition of a capital asset is one that is bought with the intention of making a profit and will benefit the firm for at least a year. Additionally, your capital equipment must have a useful life of more than one year in order to meet present value and future value in computing depreciation. If it doesn’t, it’ll be classified as consumable by most accounting systems.
5. Qualifies as Tangible Property
Non-tangible assets that benefit a firm, such as trademarks and intellectual property, are included in the definition of capital assets. However, in order to comprehend capital equipment purchase, the final feature should be that it is a physical asset.
Tangible property is defined by taxing jurisdictions as everything that can be moved and is used in the company. Items acquired for resale may not qualify as tangible property and would be classified as inventory rather than capital equipment.
Capital Equipment is classified as a non-current asset in the financial world, indicating it is depreciated and capitalized over the course of its useful life. In general, we choose contemporary technology and equipment that can produce a higher-quality product at a cheaper cost and with less waste.
long-term objectives, future technology developments, the need for new goods, and other considerations unique to each firm must all be considered when making capital investment decisions.