Updated July 11, 2023
Definition of Property Plant and Equipment
Property, plant, and equipment can refer to the company’s physical assets, i.e., tangible. They reflect under the head non-current assets in the company’s balance sheet, which intend to be used for long-term purposes by the company to generate revenue in the long run, and the same cannot be liquidated easily.
Explanation
Property, plant, and equipment consist of assets like plant and machinery, vehicles, and other immovable assets which yield income to the business by producing the goods or yielding the rent. The company classifies physical assets under property, plant, and equipment, valuing them at their historical cost. The historical cost includes the purchase and direct expenses incurred until installation and reduces by the accumulated depreciation. These assets commonly refer as fixed assets. Investment in pro., plants, and machinery is good for the organization as it reflects the intention to run for a long time. Investors also get interested in investing if the investment in property, plant, and equipment is more. Investing in property, plant, and equipment also generates profit for the organization, contributing to earning income.
The Formula for Property Plant and Equipment
Prop Plant and Equipment are valued at carrying cost, which is historical cost plus any additions or capital expenditures during the period and less the accumulated depreciation. Depreciation is normal wear and tear in the value of assets, the rates of which are defined by the act. The initial prop, plant, and equipment valuation measures at purchase or historical cost. The repairs or replacement of parts that form part of capital expenditure are also added to the asset’s carrying value. The formula for calculating the prop, plant, and equipment is as under:
Qualifying direct expenditures are expenditures incurred till installation, like transport expenditure, trial run cost, etc., in the case of plant and machinery.
The direct qualifying expenditure for other assets like an immovable prop includes the brokerage cost, registration, stamp duty cost, etc.
Where,
- Capital Expenditure includes the expenditure which increases the efficiency of the assets, like a replacement of an important part, renovation of the prop, or any other expenditure on the prop which helps yield a better income.
- Additions imply the value of new PPE Purchased during the year.
- Disposal implies the sale of an asset or any part.
- Accumulated Depreciation is the normal wear and tear in the value of assets applied to date.
Examples of Property, Plant, and Equipment
The Non-current Assets of the company consist of the following:
|
Particulars |
Amount ($) |
| Land & Building | 900,000.00 |
| Plant and Machinery | 700,000.00 |
| Vehicles | 500,000.00 |
| Patents | 200,000.00 |
| Investment | 150,000.00 |
| Total | 2,450,000.00 |
The Accumulated Depreciation is $ 250,000
The company replaces the major part during the year, amounting to $ 50,000. Calculate the value of PPE.
Solution:
Prop, plant, and equipment do not consider intangible assets:
Calculation of prop plant and equipment:
|
Particulars |
Amount ($) |
| Land & Building | 900,000.00 |
| Plant and Machinery | 700,000.00 |
| Vehicles | 500,000.00 |
| Total | 2,100,000.00 |
| Add: Capital Expenditure | 50,000.00 |
| Less: Accumulated Depreciation | (250,000.00) |
| Net PPE | 1,900,000.00 |
Measurement of Property, Plant, and Equipment
Initially, Prop Plant and Machinery value at historical cost, subsequently at carrying value. Historical cost includes the purchase and direct expenditure related to PPE until the prop is used. The carrying cost includes the initial valuation, additions or capital expenditures, fewer sales, and accumulated depreciation.
Depreciation of Property, Plant, and Equipment
The company will depreciate property, plant, and equipment due to normal wear and tear, which occurs when the assets are continuously used or decrease in value over time. Depreciation is applied to the Assets like plants and machinery as they are continuously used for production. Vehicles, whether used for the transport of goods or used by employees for traveling, office equipment, etc., as the value gets depreciated with the passage of time. On immovable assets like land and building, depreciation cannot be applied as the value is appreciated in nature. The depreciation rates are different for different types of assets, which are specified per the law of different countries.
Difference Between Property, Plant and Equipment, and Non-Current Assets
- Prop, Plant, and Equipment are a narrow concept as it is part of the non-current asset, whereas non-current assets are a wider term which, along with the prop, plant, and equipment, also include intangible assets like goodwill, patents, etc.
- The company owns tangible assets such as property, plant, and equipment, while non-current assets can be tangible or intangible.
- Prop plants and equipment are hard to liquidate, whereas some non-current assets like investments can be liquidated quickly.
Advantages
- Investment in Prop, Plant, and Equipment gives long-term benefits to the organization.
- Higher investment in prop, plant, and equipment yields higher profits.
- If the investment in prop, plant, and equipment is huge, it attracts more investors as the investment in PPE reflects the intention of long-term goals.
- Continuous usage and normal wear and tear levy depreciation on the assets covered in property, plant, and equipment, ensuring they measure fairly.
Disadvantages
- The investment amount is huge as each Prop, Plant, and Equipment asset carries a huge purchase cost; hence, only capital-intensive organizations can afford to invest.
- The maintenance cost of props, plant, and equipment is high as the machinery and vehicles need timely servicing.
- Prope, plant, and equipment do not include intangible assets, whereas most intangible assets contribute more than physical assets to income earning.
Conclusion
Property, plant, and equipment are the company’s physical assets, including immovable properties, plant and machinery, and vehicles. PPE is measured initially at a historical purchase cost plus direct expenses. PPE is measured at carrying value on each balance sheet date: initial cost plus additions or capital improvements, fewer disposals, and the accumulated depreciation. Each country defines the rates of depreciation as per governing law.
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