Property, Plant and Equipment
Assets of a company having physical existence and expected to be used for a period exceeding one year form a part of property, plant and equipment. Property, plant and equipment are alternatively referred to as tangible fixed assets.
Important components of property, plant and equipment include:
- Land and land improvements
- Plant and machinery
- Equipment, etc.
Expenditure incurred on purchase of property, plant and equipment is called capital expenditure. Such an expenditure is capitalized which means it is recorded on the balance sheet instead of writing it off against revenues on income statement. The capitalized cost of an item of property, plant and equipment include:
- The invoice price of the plant paid to the supplier.
- The freight paid to bring the plant to the installation site.
- The installation fees paid to the engineers.
- The cost incurred on testing the plant minus related proceeds, etc.
Certain assets have unlimited useful life such as land and they are not depreciated. Other assets such as buildings, vehicles, etc. loose their value over their useful life and are called depreciable fixed assets.
Since fixed assets are used for a period of more than one year, we must have a mechanism to expense out the cost of the fixed assets on some systematic basis. This process of allocation of fixed asset cost over period is called depreciation.
Each fixed asset has some useful life, for example say 2 year in case of a computer. Most assets are scraped but some may have certain value at the end of their life, for example we may expect to get considerable proceeds from selling a vehicle at the end of its useful life, this value at the end of the useful life is of an asset is called its residual value, salvage value or scrap value. We only depreciate that portion of cost which exceeds the salvage value. In other words the depreciable amount is cost minus salvage value.
The depreciation figure appears on the income statement as an expense. For the balance sheet purpose, we maintain a contra-asset account called accumulated depreciation account. As the name suggests, this account holds all the depreciation charged on a particular asset since its acquisition. The fixed assets are presented on balance sheet on cost less accumulated depreciation basis. This cost less accumulated depreciation figure is called net fixed assets.
Written by Obaidullah Jan