What is considered a capital asset?

A capital asset is defined as a long-term resource that provides future benefits to an organization. This definition stems from the fundamental nature of capital assets, which are generally investments in property, plant, equipment, and other durable goods that contribute to the operational capacity or revenue generation of an entity over an extended period.

In the context of governmental accounting and financial reporting, capital assets are not just about the initial acquisition cost; their value resides in their expected long-term utility and the economic benefits they will deliver over time. For example, a building or machinery purchased for a city's public works department would be classified as a capital asset because it is expected to serve the city for many years, providing services or generating income.

Recognizing this, it is clear why the other options do not align with the definition of capital assets. Low-cost items, while they may be necessary for operations, do not typically qualify as capital assets due to their short lifespan or minimal contribution to long-term benefits. A temporary utility lacks permanence and future benefits, and would not be classified as a capital asset. Lastly, a liability represents an obligation for the organization, which is the opposite of what a capital asset signifies; an asset is a resource that provides value, whereas a liability signifies a claim