Property Plant and Equipment

Definition of Property Plant and Equipment

Property, plant, and equipment can be referred to as the physical assets of the company i.e., they are tangible in nature and are reflected under the head non-current assets in the balance sheet of the company which is intended to be used for long-term purposes by the company in order to generate the 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 assets classified under property, plant, and equipment are physical assets and valued at the historical cost i.e., cost of purchase plus direct expenses incurred till installation less accumulated depreciation. The assets are also called fixed assets. Investment in pro., plants, and machinery is good for the organization as it reflects the intention to run for a long time. The investors also get interested in investing if the investment in property, plant, and equipment is more. The investment in property, plant and equipment also yields towards generating profit for the organization as it contributes to earning income.

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 valuation of prop, plant, and equipment is measured at purchase or historical cost. The repairs or replacement of parts that form part of capital expenditure are also added to the carrying value of the asset. The formula for calculating the prop, plant, and equipment is as under:

Gross PPE = Purchase Cost + Qualifying Direct Expenditure

Qualifying direct expenditures are expenditures incurred till installation like transport expenditure, trial run cost, etc. in the case of plant and machinery.

In the case of other assets like an immovable prop, the qualifying direct expenditure includes the brokerage cost, registration, stamp duty cost, etc.

Net PPE = Gross PP&E + Capital Expenditure +Additions to PPE– Disposal of Assets – Accumulated Depreciation

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 in yielding 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.

Example 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 are valued at historical cost and subsequently, it is valued at carrying value. Historical cost includes purchase cost plus direct expenditure related to PPE till the prop is put to use. The carrying cost includes the initial valuation plus any additions or capital expenditures less any sales and the accumulated depreciation.

Depreciation of Property, Plant, and Equipment

Prop plant and equipment are to be depreciated due to normal wear and tear in the value of assets. Normal wear and tear apply when the asset is continuously used or gets depreciated with the passage of time. Depreciation is applied to the Assets like plants and machinery as they are continuously used for production, Vehicles, whether used for 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, the depreciation cannot be applied as the value is appreciated in nature. The rates of depreciation are different for different types of assets which are specified as per the law of different countries.

Difference between Property, Plant and Equipment, and Non-Current Assets

• Prop, Plant, and Equipment is 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.
• Prop Plant and Equipment are tangible assets of the company whereas the non-current assets may or may not be tangible in nature.
• Prop Plant and equipment are very hard to liquidate whereas some of the non-current assets like investments can be liquidated in a short time.

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.
• The assets covered in prop, plant, and equipment are measured fairly as the depreciation is levied on the assets due to continuous usage and normal wear and tear.

Disadvantages

• The investment amount is huge as each asset of Prop, Plant, and Equipment carries the huge cost of purchase hence only capital-intensive organizations can afford to invest.
• The maintenance cost of prop, 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 in income earning.

Conclusion

Property, plant, and equipment are the physical assets of the company which includes the assets like immovable properties, plant and machinery, and vehicles. PPE is measured initially at a historical cost which is purchase cost plus direct expenses and on each balance sheet date, PPE is measured at carrying value which is initial cost plus additions or capital improvements less disposals and the accumulated depreciation. The rates of depreciation are defined by each country as per governing law.

Recommended Articles

This is a guide to Property Plant and Equipment. Here we discuss the introduction and measurement of property, plant, and equipment along with an example. You may also have a look at the following articles to learn more –

1. Cash Flow vs Net Income
2. Variable Costing
3. Other Comprehensive Income
4. Tax Fraud