To most of us, a raw coconut is just a coconut. To accountants putting together financial statements, however, a coconut can be a consumer good or capital good, depending on if it was sold directly to a customer or used to make coconut water. This example provides some key takeaways: capital goods are tangible assets used to make something else, while final products are things consumers buy.
In this article, we’ll explore the core capital goods definition—a category encompassing some of the essential equipment, fixtures, and other goods that keep businesses running—as well as its various subtypes.
What are capital goods?
Capital goods are the physical assets used to produce finished goods and services. Unlike consumer goods, which are purchased by end-users for personal use or final consumption, capital goods are deployed by businesses to produce goods, provide services, or enhance overall operational efficiency.
On financial statements, capital goods often appear as fixed assets on the “property, plant, and equipment” line items. Accountants track their value on an ongoing basis because capital goods depreciate over time; that is, they gradually lose value due to wear and tear.
Capital goods can also be depleted. For example, a company that manufactures and bottles coconut water would buy large quantities of raw coconuts, which would deplete as they are used. By contrast, equipment used by that same company to extract coconut water and separate it from the pulp would depreciate over time.
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Capital goods vs. consumer goods
Capital goods and consumer goods share some similarities, but they have the following key differences:
Purchaser
Manufacturers and other businesses buy capital goods. In this way, capital goods contribute to economic production. A business making a capital investment plays an essential part in economic growth.
In contrast, a consumer good is any good purchased by a customer for personal use and not used to produce another good. Consumer goods are sometimes referred to as finished products, final goods, or end goods because they wind up in the hands of a consumer or end user.
Use
A physical good could be considered a consumer or capital good, depending on how it is used. For example, a car is considered a consumer good if an individual uses it to commute to work. A car used by a company to transport workers to and from a job site is considered a capital good.
The very same item could be a capital good at some times in its lifespan and a consumer good at others. For example, the same oven could be used to produce cookies for a bakery (capital good) and then be resold to a private homeowner to cook meals (consumer good). Remember, capital goods are products used by a business to produce products or services.
Types of capital goods
- Machinery and equipment
- Raw materials and components
- Vehicles
- Software
- Facilities and structures
- Fixtures and furniture
You can categorize capital goods into a range of types based on their function and role in the production process:
Machinery and equipment
Machinery and equipment is perhaps the broadest category of capital goods, encompassing the tools used in a variety of business functions: manufacturing, extraction of natural resources, communication, and more. Some examples of capital goods that qualify as machinery and equipment include:
- Industrial robots
- Assembly lines
- Processors
- Kitchen appliances
- Agricultural machinery
- Computer hardware and data servers
- Telephone systems
- Landscaping tools
Raw materials and components
Raw materials and components are an essential part of any business’s capital stock. These are the product building blocks: materials, ingredients, or inputs purchased for eventual incorporation into manufactured final goods, or used to power machinery or vehicles. Examples of raw materials and components are:
- Screws, nuts, bolts, and other hardware
- Cooking ingredients like flour, oil, sugar, and salt
- Fabric, leather, and other upholstery
- Gasoline
- Wood
- Adhesive
Vehicles
Some vehicles are considered capital goods. This includes all motor vehicles facilitating the movement of raw materials, components, or finished products within a supply chain. Some examples of vehicles a business might own as capital goods include:
- Cars for transporting workers to work sites
- Warehouse forklifts
- Delivery trucks
- Cargo vans
- Refrigerated trucks
- Utility trucks
- Tanker trucks
- Cranes
Software
Software is considered a capital good when businesses use it in production processes or operations. Unlike consumer software, which is often used for personal enjoyment or individual tasks, business software is an integral part of organizational infrastructure, enhancing efficiency, productivity, and competitiveness. Some examples of software capital goods include:
- Enterprise resource planning (ERP) systems
- Customer relationship management (CRM) software
- Computer-aided design (CAD) software
- Financial management and accounting tools
- Manufacturing execution systems (MES)
- Supply-chain management software
- Data analytics and business intelligence (BI) software
- Social media management programs
Facilities and structures
Facilities and structures serve as physical spaces for administration, business operations, product storage, and virtually any other business process. Examples of facilities and structures include:
- Manufacturing plants
- Warehouses
- Office space and office buildings
- Retail storefronts
- Distribution centers
- Data centers
Fixtures and furniture
Fixtures refer to permanent installations or attachments within a building, while furniture includes movable items used for seating, storage, and work surfaces. Together, they form the physical infrastructure that supports various business activities and operations within a facility. Examples of fixtures include:
- Lighting
- Plumbing
- Built-in cabinetry
- Partitions
- HVAC systems
Examples of furniture include:
- Desks
- Chairs
- Conference tables
- Shelving
- Lounge or reception-area seating
- Artwork, plants, and other decor
Capital goods FAQ
What are examples of capital goods?
Examples of capital goods include manufacturing equipment or computer hardware; raw materials or basic food ingredients; vehicles; software; facilities and structures; fixtures; and furniture.
Why are capital goods important?
Capital goods enable businesses to produce consumer goods or facilitate the provision of services. Some capital goods can reduce costs associated with production, and some are simply indispensable to certain business functions. For instance, you’d have a hard time selling freshly baked goods without an oven, or original graphic t-shirts without a silkscreen press.
How does depreciation affect capital goods?
Depreciation refers to the gradual decline in the value of capital assets over time due to wear and tear, obsolescence, and other factors. Depreciation expense is recognized on a company’s balance sheet and income statement. It lets businesses spread out the cost of capital goods purchased over the course of their useful life instead of taking the large expense upfront all at once.
