When there is efficiency and innovation and no history of losses in a company's operations, top leadership may focus on expanding market share and growing the business. But when losses start crippling strategic initiatives and reducing money in corporate vaults, senior executives may think about improving fixed assets. Capital improvement assets, the result of these operational modifications, are integral to a balance sheet.
A capital improvement asset is money a company doled out to repair, improve or increase the operational efficiency of a capital asset, also known as a fixed resource or tangible asset. Examples include commercial establishments, highways, residential dwellings, machinery and heavy-duty equipment. The business must spend a substantial amount and the improvements must be significant before the transaction can qualify as a capital improvement asset. Under accounting guidelines, an improvement is a capital betterment asset if it extends the estimated operational life of the asset, increases its capacity or efficiency, and the improvement increases the quality of outputs or reduces previously assessed operating expenses.
To record capital improvement expenses, a corporate bookkeeper credits the cash account and debits the corresponding capital improvement asset account, which is a fixed asset account. In accounting terminology, crediting cash means reducing company money. Fixed assets are those a business will use for several years, so it makes sense to include capital improvement expenses in the "fixed assets" category. Capital improvement assets are subject to depreciation, which spreads the resources' costs over the number of years an organization will use them. To depreciate a capital improvement asset, debit the depreciation expense account and credit the accumulated depreciation account.
As long-term assets, capital improvement assets make their way into the "property, plant and equipment" (PPE) section of a balance sheet. The PPE section is where accountants lump all fixed assets, a move aimed at regulatory compliance and analytical convenience. Accumulated depreciation is a contra-account that reduces the value of the corresponding capital improvement asset over the depreciation term, which may span anywhere from a few months to two or three decades -- as is often the case for highways.
Capital improvement assets often call for significant costs, and a company's leadership ensures these expenses don't break the operating bank. Therefore, management studiously analyzes after-improvement cash outflows to determine how much money the business will have within the short term -- say, in three to six months -- and decide whether borrowing is a strategically sensible way to keep operating activities afloat.
- University System of Georgia: 7.1 Capital Asset Definitions and Guidelines
- New Mexico State University: Capital Asset Guide; May 2009
- Texas Comptroller of Public Accounts: Capital Asset Categories -- Leasehold Improvements
- Washington State Office of Financial Management; Valuing, Capitalizing and Depreciating Capital Assets; July 2009
Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.