Physical capital refers to non-human assets used in the production process, including machines, buildings, and vehicles. It is important to define and classify these assets for accounting and tax purposes.
Physical capital is a type of asset used in the production or manufacturing process that allows a company to create goods and services for sale to consumers. In its broadest application, this type of capital refers to any type of non-human asset used in this production process. For the most part, land is not classified as physical capital and, along with labor and physical capital, are considered the three basic types of assets needed for the successful operation of a business.
The definition of labor for physical capital is usually focused on assets that are manufactured. Within the scope of this approach, the machines used to create commodities of all kinds would qualify as this type of capital. Machines used in textile operations, manufacturing electrical components, or even the system element used to provide telecommunications services to businesses and residential consumers would all fall into this category. Even agricultural equipment such as automated milking machines would meet the basic criteria for this class of capital.
Along with machines, buildings are also generally classified as physical capital. Any type of building used as part of the company’s operation would qualify. Along with the plant that houses the actual production process, facilities such as warehouses owned by the company would be considered physical capital. Even buildings that serve the purpose of housing administrative, executive or sales personnel would be included in this category.
Vehicles are also among the assets that are generally classified as physical capital. This includes vehicles used internally as part of the business operation, as well as vehicles used to transport finished goods from one point to another. For example, if a textile company produces goods by refining raw materials in one facility, then transports those refined materials to a separate facility for carding and spinning into finished products that are ultimately sold to customers, the vehicles used in transport will have quality like this form of capital.
As with any type of business asset, defining the meaning of physical capital is important for the accounting process and for calculating taxes. Depending on the tax regulations applicable to the area where the assets are in active use, the company may be able to claim capital depreciation over a period of time, helping to result in a lower tax debt. For this reason, it is important to qualify capital assets in accordance with government guidelines and take advantage of any tax benefits offered.
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