Equity items, such as buildings and machinery, are long-lasting assets that can be financed over time. They appear on a company’s balance sheet and can be depreciated for tax purposes. Financing can be done through debt, bonds, or shares, and the obligation is typically tied to the expected life of the equipment.
An equity item is property in a business or government that will last several years and is likely to be financed over a period of years as well. While it is possible to purchase capital items with cash, it is likely that the savings from those items have been realized over a period of time. Some common examples of capital items include buildings and undeveloped real estate, especially for businesses or governments. Roads and bridges are also capital items that the government typically owns.
While item features can vary significantly, they all have a few things in common. An equity item, for example, typically appears on the balance sheet and is counted in the company’s total line of assets. However, the item is generally worth less as time goes on, which is something a business can write off in a process known as depreciation. While it may seem like the company’s assets are dwindling, it can also mean the company is assessed less in taxes.
These items serve one of two purposes. Either they are present to earn money for a business, or they are used in the service of a government or population. A heavy piece of machinery, especially in an industrial setting, is an example of a capital item that can be used in the process of making money by taking raw materials and helping to turn it into a finished product. A bridge cannot earn money for anyone, unless it is a toll bridge, but it can be used by an entire population as a service.
Financing a capital item can be done through a variety of means. Governments and companies can often use the vouchers to get the money needed for the item. Essentially, the agency issues debt, or sells bonds, in an attempt to raise the cash needed to purchase the item. Some companies may also issue shares to raise money needed for equipment or new locations. Others may try to cash flow the entire project with reserves that are already available.
Once all payments have been made, and the debt obligation is understood, the bonds are considered called. At that point, there is no further obligation, and the item is owned without any liens on it. Typically, a company or government will not issue bonds that have a payment plan longer than the expected life of the equipment. For governments, a common period for tying up capital items is 20 years, but that can vary.
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