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What is Physical Capital?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 15 September 2016
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    Conjecture Corporation
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Physical capital is a type of asset that is used in the production or manufacturing process that allows a business to create goods and services for sale to consumers. In its broadest application, this type of capital relates to any type of non-human assets that are used within that production process. For the most part, land is not classified as physical capital, and along with labor and physical capital is considered the three basic type of assets that are required in order to successfully operate a business.

The working definition for physical capital is typically focused on assets that are themselves manufactured. Within the scope of this approach, machinery used to create goods of all types would qualify as this type of capital. Machinery used in textile operations, in the manufacturing of electrical components, or even the system element used to provide telecommunications services to businesses and residential consumers would fit into this category. Even farming equipment, such as automated milking machinery, would meet the basic criteria for this class of capital.

Along with machinery, buildings are also usually classed as physical capital. Just about any type of building that is utilized as part of the company operation would qualify. Along with the plant that houses the actual production process, facilities such as warehouses that are owned by the company would be considered physical capital. Even buildings that serve the purpose of housing administrative, executive, or sales personnel would be included in this category.

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Vehicles are also among the assets that are often classified as physical capital. This includes vehicles that are used as part of the business operation internally as well as vehicles that are used to transport finished goods from one point to another. For example, if a textile company produces goods by refining the raw materials at one facility, then transports those refined materials to a separate plant facility for carding and spinning into finished goods that are ultimately sold to clients, the vehicles used in the transport would quality as this form of capital.

As with any type of business asset, defining what is meant by physical capital is important to the accounting process, and to the calculation of taxes. Depending on the tax regulations that apply to the area where the assets are in active use, the company may be able to claim depreciation on the capital over a period of time, helping to result in a lower tax debt. For this reason, it is important to qualify capital assets according to governmental guidelines and take advantage of every tax break offered.

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