In business, assets can take several forms — equipment, patents, investments, and even cash itself. Here’s a rundown of the different types of assets a business can possess, and the type of assets that are considered to be plant assets. Since these assets produce benefits for more than one year, they are capitalized and reported on the balance sheet as a long-term asset. This means when a piece of equipment is purchased an expense isn’t immediately recorded. Instead, the cost of the asset is allocated over its useful life. Plant assets are usually expensive, long-term investments made to underpin a company’s production process.

• Fixed assets can be used for a variety of purposes, such as building a house, buying a car, or renting a room in a hotel.
• Over time, plant assets lose value, and this decline refers to depreciation.
• 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.
• Generally, plant assets are among the most valuable company assets and tend to be relied on greatly over the long term.
• What these assets all have in common, that also differentiates them from current assets, is that they are not going to turn into cash any time soon and their connection to revenue is indirect.

A plant asset is an asset with a useful life of more than one year that is used in producing revenues in a business’s operations. In accounting of plant assets, we will see where a company records the purchase of an asset, depreciation as well as disposal. The assets on a balance sheet contribute to a company’s overall profitability and worth. Plant assets are frequently among the most useful and financially supportive assets. In this article, we’ve explained the concept of plant assets in very detail. We hope you’ll know the difference between plant assets and other non-current assets and the accounting treatment.

What are the most common depreciation methods?

In contrast, plant assets represent long-term property expected to be around for at least a year, often quite a bit longer than that. The actual use of a plant asset is what causes physical depreciation. Functional depreciation is caused by obsolescence factors such as technological advances and less demand for a particular product or service.

PP&E is listed on a company’s balance sheet by adding its value minus accumulated depreciation. PP&E provides key functionality to help generate economic value to a company. For example, a company that needs to deliver its products gains value through the use of delivery vehicles, which would be considered PP&E.

• Buildings are structures like factories, offices, warehouses, and other places where businesses produce goods or provide services.
• Even if a company does not operate on-site or own property, many businesses profit from purchasing land, even if they do not intend to use it until later.
• The accountant debits the entire costs to Land, including the cost of removing the building less any cash received from the sale of salvaged items while the land is being readied for use.

Equipment is also quite valuable and crucial to the operation of any organization. It propels operations forward and allows a company to generate money on a consistent basis. Equipment is also one of the most varied forms of plant assets since it differs based on the industry or the specific demands of each company. Every business concern or organization needs resources to operate the business functions. The resources are sometimes owned by the company and sometimes borrowed by external parties.

A Guide to Properly Managing Plant Assets

Let’s skim through the concept of depreciation for the plant assets. Depreciation is the periodic allocation of an asset’s value(cost) over its useful life. The basic principle working behind the depreciation of assets is the matching principle. The matching principle states that expenses should be recorded in the same financial year when the revenue was generated against them. As the fixed assets last longer, the expenses are divided over the item until they’re useful.

What Are Noncurrent Assets?

Plant assets are physical resources that companies own for more than a year and use to create & sell goods/services to generate income. These are fixed assets such as land, buildings, factories, machinery, and vehicles. When a company acquires a plant asset, accountants record the asset at the cost of acquisition (historical cost). When a plant asset is purchased for cash, its acquisition cost is simply the agreed on cash price. This cost is objective, verifiable, and the best measure of an asset’s fair market value at the time of purchase. Fair market value is the price received for an item sold in the normal course of business (not at a forced liquidation sale).

Straight Line Method

The last section in this chapter explains how accountants use
subsidiary ledgers to control assets. Plant assets are reported within the property, plant, and equipment line item on the reporting entity’s balance sheet, where it is grouped within the long-term assets section. The presentation may pair the line item with accumulated depreciation, which offsets the reported amount of the asset.

Tom’s Machine Shop is a factory that machines fine art printing presses. One of the CNC machines broke down and Tom purchases a new machine for $100,000. The bookkeeper would record the transaction by debiting the plant assets account for $100,000 and crediting the cash account for the same. While they’re most definitely both considered part of the asset category, current assets and plant assets don’t share all that much in common. The major characteristics of plant assets are that they are acquired for use in operations and not for resale, that they are long-term in nature, and that they have physical substance. The expected useful life of the machine is 7 years, and the salvage (scrap) value after 7 years will be $50,000.

This chapter introduces how organizations categorize and account for fixed assets. It also covers the various methods of depreciation, why each method is used, and the “rate of return” expected by an organization when they purchase an asset. You should be able to explain fair market value, acquisition costs, historical costs, and which costs are capitalized.

The assets can be further categorized as tangible, intangible, current, and non-current assets. It includes cash/bank, short-term securities, inventories, account receivables, etc. PP&E are assets that are expected to generate economic benefits and contribute to revenue for many years. However, land is not depreciated because of its potential to appreciate in value.

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Common examples of plant assets

Depending on the industry and purpose of a company, a number of items might now qualify as plant assets. Therefore, the first few years of the assets are charged to higher depreciation expenses. The later years are charged a lower sum of depreciation based on the assumption that lower revenue is generated. The depreciation a beginner’s guide to notes payable expense in this method is calculated by subtracting the residual value of an asset from the cost and dividing the remainder by a number of years(useful life). The straight-line method’s illustration has been given in the above example. There are different methods of depreciation that a business entity can use.

The only exception is land, which does not have a limited useful life, so cannot be depreciated. In the end, be careful to distinguish between asset types both on the balance sheet and in practice. Each asset serves a certain purpose in how it helps a business, and it is more advantageous to focus on their functions rather than their relative worth as long as they serve entities well. They provide several contributions to a company and understanding how they work can aid in tracking the organization’s growth. The same process will be repeated every year at the end of the financial year. Our sales engineers are experts in automatic asset tracking, tagging and identification,a nd can answer all your questions.

On the other hand, the borrowed money is the liability or obligation for the business entity. Current assets are short-term, meaning they are items that are likely to be converted into cash within one year, such as inventory. Property, plant, and equipment are recorded in a company’s balance sheet and need to be calculated appropriately.