4.7: Property, Plant, and Equipment Accounting

Property, plant, and equipment (PP&E) are tangible assets businesses use to support core operations over the long term. These include items such as buildings, machinery, and land. On financial statements, PP&E appears under non-current assets and is typically recorded at historical cost, including any expenses to make the asset operational.

Depreciation applies to most PP&E, reflecting the asset's reduction in value due to use and aging. This process allocates the asset's cost over its useful life, aligning expenses with the periods benefiting from the asset. For example, a company buying a $60,000 machine with a ten-year life would depreciate $6,000 annually using straight-line depreciation. Over time, accumulated depreciation lowers the asset's book value on the balance sheet.

Land, however, is not depreciated because it does not generally diminish in utility. Its value remains constant unless affected by external factors such as impairment.

Understanding PP&E is crucial for financial analysis. The net book value (cost minus depreciation) helps assess a company’s productive capacity. Analysts use these figures to evaluate asset utilization and investment efficiency. Identifying underused or outdated assets can reveal operational challenges and guide strategic decisions.

Property, Plant, and Equipment are long-term assets that a company uses in its day-to-day operations. This category includes land, buildings, machinery, and equipment.

On the balance sheet, Property, Plant, and Equipment appear under the non-current assets section.

When a company buys these assets, they are recorded at their original purchase price.

Over time, most of these assets lose value due to wear and tear. This is called depreciation.

However, land is an exception. It is not depreciated because it does not wear out or lose utility over time.

For example, consider Apex Corporation, which buys a machine for fifty thousand dollars.

It expects the machine to last ten years, so it depreciates it by five thousand dollars annually.

After one year, the balance sheet will show the machine at its original cost of fifty thousand dollars minus five thousand dollars of depreciation, resulting in a net book value of forty-five thousand dollars.

Understanding the value of Property, Plant, and Equipment helps investors and managers evaluate how efficiently a company utilizes its long-term assets.