Is a Certificate of Deposit a Capital Asset?
Investors and the public purchase certificates of deposit, or CDs, from financial institutions because these products are safe and risk-free assets. Companies also engage in CD transactions to invest their operating cash surplus and generate short-term interest income. Corporate capital assets enable firms to run their businesses with a long-term perspective.
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Capital Assets
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A capital asset is an economic resource you use for more than one year. In accounting terminology, "capital asset," "tangible resource," "long-term asset" and "fixed resource" are synonyms. Tangible resources usually have physical substance, unlike intangible assets, such as patents, copyrights and trademarks. Fixed assets include automobiles, real estate, equipment and machinery. In the corporate setting, accountants count factories and manufacturing processes as long-term assets.
Significance
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Tangible assets generally constitute a major portion of a company's balance sheet. Because of their long-term useful life, capital resources are important elements that management keeps a close eye on. Corporate procedures that ensure accurate capital-asset reporting require financial expertise, accounting knowledge and a familiarity with regulatory guidelines, such as U.S. Securities and Exchange Commission directives.
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Certificates of Deposit
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A CD is an investment asset you purchase at a financial institution, such as a bank or an insurance company. The bank generally pays a fixed rate of return on the CD, and you may keep your account open for three months, six months, one year or longer. If you withdraw funds before the CD maturity, the bank charges early-withdrawal fees. Accounting norms don't consider CDs as capital assets, even if you sign a deposit contract for a period exceeding 12 months. For example, if you open a five-year CD at your savings bank, you record the account in the "other non-current assets" section of the balance sheet, not in the "long-term assets" section.
Accounting
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To record a CD in your books, debit the CD asset account and credit the cash account. Crediting cash, an asset account, means reducing its amount. The accounting concepts of "credit" and "debit" are distinct from the banking terms. To record the purchase of a capital asset, debit the "property, plant and equipment" account and credit the vendor payables account.
Financial Reporting
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Accountants report capital assets and corporate CDs as resources in a company's balance sheet, also known as a statement of financial position. The accounting treatment is the same for individuals. To calculate your net worth, subtract your debts from your assets. Transactions related to CDs and capital assets impact other accounting statements, such as the profit and loss report. For example, you record interest on the CD as income, and indicate early-withdrawal fees as operating expenses.
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