The depreciation expense in this method is calculated by subtracting the residual value of an asset from the cost and dividing the remainder by a number of years(useful life). The straight-line method’s illustration has been given in the above example. Every business concern or organization needs resources to operate the business functions. The resources are sometimes owned by the company and sometimes borrowed by external parties. On the other hand, the borrowed money is the liability or obligation for the business entity. PP&E are assets that are expected to generate economic benefits and contribute to revenue for many years.
One of the CNC machines broke down and Tom purchases a new machine for $100,000. The bookkeeper would record the transaction by debiting the plant assets account for $100,000 and crediting the cash account for the same. Since these assets produce benefits for more than one year, they are capitalized and reported on the balance sheet as a long-term asset. This means when a piece of equipment is purchased an expense isn’t immediately recorded. The assets can be further categorized as tangible, intangible, current, and non-current assets.
In business, assets can take several forms — equipment, patents, investments, and even cash itself. Here’s a rundown of the different types of assets a business can possess, and the type of assets that are considered to be plant assets. Plant assets are reported within the property, plant, and equipment line item on the reporting entity’s balance sheet, where it is grouped within the long-term assets section. The presentation may pair the line item with accumulated depreciation, which offsets the reported amount of the asset. Depreciation is the process by which a plant asset experiences wear and tear over a particular period of time.
The total amount of a company’s cost allocated to depreciation expense over time is called accumulated depreciation. Let’s skim through the concept of depreciation for the plant assets. Depreciation is the periodic allocation of an asset’s value(cost) over its useful life. The basic principle working behind the depreciation of assets is the matching principle. The matching principle states that expenses should be recorded in the same financial year when the revenue was generated against them. As the fixed assets last longer, the expenses are divided over the item until they’re useful.
Cost includes all normal, reasonable, and necessary expenditures to obtain the asset and get it ready for use. Acquisition cost also includes the repair and reconditioning costs for used or damaged assets as longs as the item was not damaged after purchase. Property, plant, and equipment (fixed assets accounting help in any project or operating assets) compose more than one-half of total assets in many corporations. These resources are necessary for the companies to operate and ultimately make a profit. It is the efficient use of these resources that in many cases determines the amount of profit corporations will earn.
At almost $23 billion, PP&E composes almost half of the total assets of $51 billion. It’s important to note that the value of plant assets (other than land) depreciates over time, and each type of asset has a specific “useful life” that is defined by the IRS. It’s impossible to manufacture products without equipment and machinery, or a building to house them. If the equipment or machinery in question is a necessary part of your business operation, it’s a plant asset. While they’re most definitely both considered part of the asset category, current assets and plant assets don’t share all that much in common.
This category of assets is not limited to factory equipment, machinery, and buildings though. Anything that can be used productively to general sales for the company can fall into this category. All intangible assets are nonphysical, but not all nonphysical assets are intangibles.
Depreciation expense — calculated in several different ways — is then carried through to the income statement and reduces net income. Over time, plant asset values are also reduced by depreciation on the balance sheet. Plant assets are usually expensive, long-term investments made to underpin a company’s production process. Needless to say, they’re an enormously important part of producing goods and/or services in an economically efficient manner. Businesses must be especially careful in making these investments since buildings and land are immovable and can’t be easily substituted. This is typically done through an aggressive plant asset maintenance plan that can be easily followed and carried out on a routine basis.
Long-term investments, such as bonds and notes, are also considered noncurrent assets because a company usually holds these assets on its balance sheet for more than one fiscal year. PP&E refers to specific fixed, tangible assets, whereas noncurrent assets are all of the long-term assets of a company. Accountants view plant assets as a collection of
service potentials that are consumed over a long time. For example, over
several years, a delivery truck may provide 100,000 miles of delivery services
to an appliance business. A new building may provide 40 years of shelter, while
a machine may perform a particular operation on 400,000 parts.
In Exhibit 4, note how the asset’s life begins with its
procurement and the recording of its acquisition cost, which is usually in the
form of a dollar purchase. Then, as the asset provides services through time,
accountants record the asset’s depreciation and any subsequent expenditures
related to the asset. We
discuss the first three steps in this chapter and the disposal of an asset in
Chapter 11. The last section in this chapter explains how accountants use
subsidiary ledgers to control assets. Regardless of the company you’re analyzing, plant assets tend to be those held for long-term use and depreciated over their useful lives. As time goes on, plant assets wear down and must be replaced, although most companies try to extend useful life for as long as possible.
Each asset serves a certain purpose in how it helps a business, and it is more advantageous to focus on their functions rather than their relative worth as long as they serve entities well. They provide several contributions to a company and understanding how they work can aid in tracking the organization’s growth. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
Later on, the company will charge the depreciation according to the method of depreciation it usually follows. 18,000 USD must be charged to the plant asset account for every financial year as a depreciation expense. In the balance sheet of the business entity, these assets are recorded under the head of non-current assets as Plant, property, and equipment. Any land maintenance, improvement, renovations, or construction to increase building operations or revenue generation capacity are also recorded as part of the plant assets. The acquisition cost of a plant asset is the amount of cost incurred to acquire and place the asset in operating condition at its proper location.
In the end, be careful to distinguish between asset types both on the balance sheet and in practice. The same process will be repeated every year at the end of the financial year. Below is a portion of Exxon Mobil Corporation’s (XOM) quarterly balance sheet from Sept. 30, 2018. Let’s take another look at The Home Depot, Inc. balance sheet as of February 2, 2020.
PP&E may be liquidated when they are no longer of use or when a company is experiencing financial difficulties. Of course, selling property, plant, and equipment to fund business operations is a signal that a company might be in financial trouble. It is important to note that regardless of the reason why a company has sold some of its property, plant, or equipment, it’s likely the company didn’t realize a profit from the sale. Companies can also borrow off their PP&E, (floating lien), meaning the equipment can be used as collateral for a loan. Buildings are assets that often retain higher quantities of value, such as office space or a physical location where consumers can do business. This might be a single storefront site for smaller companies or numerous locations or buildings for bigger enterprises.