How are Capital Assets different from Merchandise Inventory? - Accounting Questions Answered

Capital assets (both tangible & intangible) are used in the day to day functioning of a company and include assets such as machinery, equipment, buildings or natural resources. On the other hand, Merchandise inventory is not used in the day to day operations of a company but instead are bought for the purpose of resale and to make a margin. For instance, a corporation that purchases a digital camera for the purpose of resale lists its digital cameras on the Inventory section of its Balance sheet. But if this same firm purchases a digital camera for the purpose of using it in daily operations to generate revenue, it would classify this asset as a Capital Asset.

Note: It is also important to note that Capital assets have a useful life of more than 1 accounting period or year which makes them different from “Current Assets” that have a useful life of 1 year or less. Merchandise inventory falls in to the category of “Current Assets” and are considered liquid assets in the Working capital ratio calculation.

Capital assets are viewed as long term net worth assets to companies because they do not depreciate or deplete as fast as inventory. For instance, a company that owns trucks as capital assets will expect to keep its trucks for at least 10 years after which they would be depreciating faster in value. However, most companies do not like to view their merchandise inventories as long term assets because they would like to have a lower merchandise turnover ratio and product more sales from existing inventories in order to generate free cash flows & continue efficient operations of the firm.

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