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A capital item is an piece of property in business or government that will lasts multiple years, and is likely financed over a period of years as well. While it is possible to buy capital items on a cash basis, chances are, the saving for those items took place over a period of time. Some common examples of capital items include buildings and undeveloped real estate, especially for businesses or governments. Roads and bridges are also capital items that the government typically owns.
While the characteristics of items can vary significantly, they all have some things in common. A capital item, for example, is usually listed on a balance sheet, and is counted in the company's total line of assets. The item, however, is usually worth less as time goes by, which is something that can be written off by a company in a process known as depreciation. While it may appear as though the company's assets are dwindling, it may also mean that the company is assessed less in taxes.
These items serve one of two purposes. They either are present to make money for a business, or be used in service to a government or population. A heavy piece of machinery, especially in an industrial environment, is an example of a capital item that can be used in the process of making money by taking raw materials and helping make it into a finished product. A bridge may not make anyone money, unless it is a toll bridge, but can be used by an entire population in a service capacity.
The financing for a capital item can happen through a variety of means. Governments and businesses may often use bonding to get the money needed for the item. Essentially, the agency issues debt, or sells bonds, in an attempt to raise the cash needed to purchase the item. Some companies may also issue stock to raise the money needed for equipment or new locations. Others may attempt to cash flow the entire project with reserves that are already on hand.
Once all payments have been completed, and the debt obligation is meant, the bonds are considered to be redeemed. At that point, there is no further obligation, and the item is owned without any lien on it. Typically, a business or government will not issue bonds that have a repayment plan longer than the expected life of the equipment. For governments, a common period for capital item bonding is 20 years, but that can vary.
Not only is it important to keep inventory of all capital items, it is also necessary to properly plan for their repair and replacement over time. Failure to maintain what is called a Capital Improvement Plan (CIP) can lead to a financial disaster. For instance, if a building has 20 heat pumps that are all installed at the same time, one can reasonably expect they will all begin to fail around the same time. Most businesses cannot afford to replace 20 heat pumps at once. A CIP lays out the expected life of capital items and a plan to replace them in a manner the business can afford, requiring funds be retained annually for that purpose. The same holds true for furnishings, vehicles, etc. A CIP is a necessary part of a financial plan for any healthy organization. Otherwise, you will find yourself with dilapidated capital items with no means of replacing them.
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