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Capital Equipment

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."

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