What Are Capital Goods?
Capital goods are tangible assets such as buildings, machinery, and equipment used to produce consumer goods or services. Capital goods are durable items and differ from consumer goods and services, which are the end product of production and manufacturing.
- Capital goods are physical assets a company uses to produce goods and services for consumers.
- Capital goods include fixed assets, such as buildings, machinery, equipment, vehicles, and tools.
- Capital goods differ from consumer goods, which are the end product of production and manufacturing.
Types of Capital Goods
Capital goods are the tangible assets used to produce products to create finished products. However, capital goods are not limited to common fixed assets such as machinery and manufacturing equipment.
The industrial electronics industry produces devices, which are capital goods that range from small wire harness assemblies to air-purifying respirators and high-resolution digital imaging systems.
Capital goods are also produced for service businesses. Hair clippers used by hairstylists, paint brushes used by painters, and musical instruments played by musicians, are among the many capital goods purchased by service providers.
Capital goods, also known as “plant, property, and equipment,” are treated as fixed assets in accounting.
Capital Goods vs. Consumer Goods
Consumer goods are the finished products that consumers buy after the production process. Although consumer goods have different classifications, examples of consumer goods include milk, appliances, and clothes.
Capital goods are not commonly sold to consumers but are used to produce other goods, which are sold to consumers. However, some capital goods can be considered consumer goods, such as airplanes, used by airlines and some consumers.
Examples of Capital Goods
- Factories or assembly line equipment used to manufacture cars and trucks
- Machines and technology used to produce goods and services
- Types of infrastructure, such as trains and cable or broadband lines
- Coffee machines used by a coffee shop
- Automobiles used by a delivery company
- Ovens used by a restaurant
- Landscaping equipment for business
What Are Considered Core Capital Goods?
Core capital goods are a class of capital goods that excludes aircraft and goods produced for the Defense Department, such as automatic rifles and military uniforms. The Census Bureau’s monthly Advance Report on Durable Goods Orders includes data on purchases of core capital goods, also known as Core CAPEX, for capital expenditure.
How Does Depreciation of a Capital Good Affect a Company?
Capital goods that a business does not consume within a single year of production cannot be entirely deducted as business expenses in the year of their purchase. Instead, they must be depreciated throughout their useful lives, with the business taking partial tax deductions spread over the years that the capital goods are in use. This is done through accounting techniques such as depreciation. Depreciation accounts for the annual loss of the tangible asset’s value during its useful life.
Why Do Businesses Invest in Capital Goods?
When businesses invest in capital goods, companies expand and produce additional products or services.
The Bottom Line
Capital goods are physical assets that a company uses to manufacture products and services for consumers. In accounting, capital goods are categorized as fixed assets, such as “plant, property, and equipment.” Capital goods differ from consumer goods, which are the result of production and manufacturing.