Definition: Equipment that you use to manufacture a product, provide a service
or use to sell, store and deliver merchandise. This equipment has
an extended life so that it is properly regarded as a fixed asset.
When deciding when to purchase and register capital equipment on
your books, there are two lines of thinking. The first is to
purchase and install the needed equipment at a point during the
year where additional volume warrants the expenditure, thereby
assuring sufficient cash flow to handle the additional debt service
or the outright purchase of the equipment. The second method is to
have the equipment purchased and installed at the beginning of the
business year or quarter closest to the time when you'll actually
need the equipment, allowing time for training and working out bugs
before the equipment is placed into full production.
The avenue you choose depends on your cash flow. If you can
service additional debt or purchase the equipment from operating
expenses, then the latter method works best. If your cash flow is
tight, then choose the former method. Either way, capital equipment
costs are accounted for under the heading "capital."