What is a capital item?

An equity item is a property owned by a company or government that will last for several years and will likely also be financed over a period of years. While it is possible to purchase capital items with cash, the savings for these items were likely made over a period of time. Some common examples of capital items include undeveloped buildings and real estate, especially for companies or governments. Roads and bridges are also capital goods that the government normally owns.

While item features can vary significantly, they all have a few things in common. An equity item, for example, usually appears on the balance sheet and is accounted for in the company's total assets line. However, the item is usually worth less over time, something a company can write off in a process known as depreciation. While it may appear that the company's assets are decreasing, it could also mean that the company is valued less in taxes.

These items serve one of two purposes. Either they are present to make money for a business, or they are used in the service of a government or population. Heavy machinery, particularly in an industrial setting, is an example of a capital item that can be used in the process of earning money by taking raw materials and helping to turn them into a finished product. A bridge cannot make anyone money unless it is a toll bridge, but it can be used by an entire population as a service.

Funding an equity item can be done in a number of ways. Governments and companies can often use vouchers to raise the money needed for the item. Essentially, the agency issues debt or sells bonds in an attempt to raise the money needed to buy the item. Some companies may also issue shares to raise money needed for equipment or new locations. Others may try to generate project-wide cash flow with reserves that are already available.

Once all payments have been made and the debt obligation understood, the securities are considered redeemed. At that point, there are no further obligations, and the item is owned without encumbrance on it. Typically, a company or government will not issue bonds that have a payment plan longer than the expected life of the equipment. For governments, a common period for pegging capital items is 20 years, but this can vary.

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