Property, Plant, and Equipment PP&E Definition in Accounting

The PP&E account is often denoted as net of accumulated depreciation. This means that if a company does not purchase additional new equipment (therefore, its capital expenditures are zero), then Net PP&E should slowly decrease in value every year due to depreciation. Property, plant, and equipment (PP&E) are long-term assets vital to business operations. Property, plant, and equipment are tangible assets, meaning they are physical in nature or can be touched; as a result, they are not easily converted into cash. The overall value of a company’s PP&E can range from very low to extremely high compared to its total assets. At the time of the trade-in, the old delivery truck has a historical cost of $40,000 and accumulated depreciation to date cf $30,000 (book value equals $10,000).

• Upgrade costs of $5,000 or more are added to the original capital or non-capital equipment.
• This chapter introduces how organizations categorize and account for fixed assets.
• Historical cost includes the purchase and direct expenditure related to PPE until the prop is used.
• These assets can span a wide range of different things that a business needs to operate or assets that are purchased for investment purposes.
• Examples include panels, work surfaces, drawers, and overhead shelves.

For instance a large business may be keen to immediately expense assets costing less than $100,000, while for a small business, the threshold may be set much lower (at say $1,000). The policy and basis must be adopted and uniformly applied to ensure that the affairs of the business are properly managed. PP&E items are commonly grouped into classes, which are groups of assets having a similar nature and use. Examples of PP&E classes are buildings, furniture and fixtures, land, machinery, and motor vehicles. Items grouped within a class are typically depreciated using a common depreciation calculation. Many items grouped into a PP&E class are assigned the same useful life for depreciation purposes.

What is PP&E?

A business should expect some wear and tear on assets as a direct result of using them to support business activity. Depreciation is an allocation process that ensures the useful life of an asset is properly identified from accounting and company valuation. In modern financial accounting usage, the term fixed assets can be ambiguous. Instead, the term non-current assets (used by the IFRS [3] and U.S. Generally Accepted Accounting Principles (GAAP) XBRL[4] reporting taxonomies) is preferred when referring to assets that will not be liquidated in the current fiscal period.

Assets (capital) with a value greater than or equal to $25,000 are recorded in the Fixed Asset Module and are assigned a useful life over which they are depreciated and subject to periodic inventories. Assets (constructed, renovated, or fabricated – CIPs) with a value greater than or equal to $50,000 are recorded in the Fixed Asset Module by “component,” each of which is assigned a useful life over which it is depreciated. 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 each
instance, purchase of the plant asset actually represents the advance payment
or prepayment for expected services.

What are Plant Assets? – Financial Accounting

It’s important to note that a tangible asset is depreciated for accounting purposes. Property, plant, and equipment (PP&E) are tangible or physical assets. They are classed as long-term assets that have a typical lifespan of over a year.

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. The additional Property, Plant and Equipment benefit is that it allows better safeguarding of the assets of the business as the custodian would be charged by and report to the board of directors in relation to the safekeeping of the assets of the company.

How is Property Plant and Equipment Used?

The value of PP&E is adjusted routinely as fixed assets generally see a decline in value due to use and depreciation. Depreciation is the process of allocating the cost of a tangible asset over its useful life and is used to account for declines in value. The total amount of a company’s cost allocated to depreciation expense over time is called accumulated depreciation. Purchases of PP&E are a signal that management has faith in the long-term outlook and profitability of its company. PP&E are a company’s physical assets that are expected to generate economic benefits and contribute to revenue for many years.

Examples include auto manufacturers, oil companies, and steel companies. If a company produces machinery (for sale), that machinery is not classified as property, plant, and equipment, but rather is classified as inventory. The same goes for real estate companies that hold buildings and land under their assets. Their office buildings and land are PP&E, but the houses or land they sell are inventory.