What Is A Plant Asset? Example and More

Let’s take another look at The Home Depot, Inc. balance sheet as of February 2, 2020. Below is a portion of Exxon Mobil Corporation’s (XOM) quarterly balance sheet from Sept. 30, 2018. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns.

Many business entities use different depreciation methods for financial reporting and tax purposes. Plant assets are recorded at their cost and depreciation expense is recorded during their useful lives. The straight-line method is the most commonly used method in most business entities. It is also called a fixed-installment method, as equal amounts of depreciation are charged every year over the useful life of an asset. The best way to manage your assets is to use an accounting software application that simplifies the entire asset management process from the initial acquisition to asset disposal.

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. Any land maintenance, improvement, renovations, or construction to increase building operations or revenue generation capacity are also recorded as part of the plant assets. 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.

Plant assets are goods that are considered long-term assets because of their high price or worth, even if the assets depreciate. It’s crucial to recognize which of your assets are plant assets, regardless of their worth. The goods you can include in this category are usually useful assets that help your business well. Plant assets are different from other non-current assets due to tangibility and prolonged economic benefits.

  • Intangible assets are non-physical assets that have a monetary value since they represent potential revenue.
  • Plant assets represent the asset class that belongs to the non-current, tangible assets.
  • Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.
  • In each
    instance, purchase of the plant asset actually represents the advance payment
    or prepayment for expected services.
  • Also, land held for speculation or not yet put into service is a
    long-term investment rather than a plant asset because the land is not being
    used by the business.

At almost $23 billion, PP&E composes almost half of the total assets of $51 billion. 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. It’s impossible to manufacture products without equipment and machinery, or a building to house them.

Plant assets are a group of assets used in an industrial process, such as a foundry, factory, or workshop. These assets are a subset of the fixed assets classification, which includes such other asset types as vehicles, office equipment, and intangible assets. Plant assets fulfill the usual criteria for a fixed asset, which means that their initial cost exceeds the capitalization limit of the entity, and they are expected to be used for at least one year. This classification is rarely used, having been superseded by such other asset classifications as Buildings and Equipment. Assets such as equipment, machinery, buildings, vehicles, and more are assets commonly described as property, plant, and equipment (PP&E). Items labeled as PP&E are tangible, fixed, and not easy to liquidate.

Understanding Property, Plant, and Equipment (PP&E)

For example, if a company sells a plant to a third party, the plant is no longer considered a fixed asset and is not included in the company’s balance sheet. Current assets are expected to be used within a year or short-term time frame. Current assets typically include cash, inventory, accounts receivable, and other short-term liquid assets.

The balance of the PP&E account is remeasured every reporting period, and, after accounting for historical cost and depreciation, is called the book value. In most cases, companies will list their net PP&E on their balance sheet when reporting financial results, so the calculation has already been done. 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.

Current assets versus plant assets

When a plant asset is acquired by a company that is expected to last longer than one year, it is recorded in the balance sheet at the end of the financial year. Besides, a part of the asset’s a guide to quarterly business taxes cost is charged to expenses account as a non-cash expense, depreciation. These assets can be used to produce revenues, but they can also be sold or disposed of at a later date.

Straight Line Method

Property, plant, and equipment are also called fixed assets, meaning they are physical assets that a company cannot easily liquidate or sell. PP&E assets fall under the category of noncurrent assets, which are the long-term investments or assets of a company. Noncurrent assets like PP&E have a useful life of more than one year, but usually, they last for many years. Any asset that will provide an economic benefit within one year is a current asset.

Equipment

Over time, plant asset values are also reduced by depreciation on the balance sheet. The land is a business area where a company establishes its factory or office to manufacture goods or provide services. On the other hand, land improvements include additional things like a parking lot, fence for security, or roads to access the facility. Determining the cost of constructing a new building is often more difficult. Usually this cost includes architect’s fees; building permits; payments to contractors; and the cost of digging the foundation. Also included are labor and materials to build the building; salaries of officers supervising the construction; and insurance, taxes, and interest during the construction period.

Any miscellaneous amounts earned from the building during construction reduce the cost of the building. The second method of deprecation is the declining balance method or written down value method. The percentage for charging depreciation is pre-decided and fixed. Every year, the percentage is applied to the remaining value of the asset to find depreciation expense. In the initial years of the asset, the amount of depreciation expense is higher and decreases as time passes. The non-current assets are the company’s long-term assets that last for many years and deliver economic benefit.

An asset is anything that can be owned or used to produce value, and can also be used for other purposes. For example, the value of a factory is the amount of value it can produce. Depreciation expenditures, on the other hand, are the appropriate part of the cost of a company’s fixed assets for the time period. Depreciation is a non-cash expenditure that decreases the company’s net profits and is recorded on the income statement.

Depending on the industry, plant assets may make up either a very substantial percentage of total assets, or they may make up only a small part. Industries like heavy shipping or oil extraction stand to employ a greater percentage of plant assets than industries like software, in which teams may be remote and sometimes globally distributed. In the same way, a company can sell its assets to a third party and use them for its own benefit. This is called an “asset sale,” and it is not considered to be a sale of a tangible asset.