Capital goods definition
/What are Capital Goods?
Capital goods are durable assets used in the production of goods and services. They include all types of fixed assets, such as production equipment, buildings, and vehicles, as well as infrastructure. Thus, a manufacturer of trains is considered part of the capital goods sector of the economy, since its trains are then used to provide the service of hauling freight. Similarly, a manufacturer of ships is also part of the capital goods sector, since those ships are then used to transport raw materials and finished goods across the ocean.
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Accounting for Capital Goods
Capital goods are not charged to expense when acquired. Instead, they are classified as fixed assets, and their cost is charged to expense over an extended period of time with depreciation charges. Depreciation gradually reduces the carrying amount of capital goods over their expected useful lives. This approach is used to roughly equate the recognition of expenses for capital goods with the revenue that they generate over time.
The Primary Factors of Production
The general classification of capital goods is considered one of the three types of producer goods in economics theory, where the other two classifications are land and labor. They are collectively known as the primary factors of production.