Property, plant, and equipment (PP&E) is tangible items that are expected to be used in more than one period and that are used in production, for rental, or for administration. This can include items acquired for safety or environmental reasons. In certain asset-intensive industries, PP&E is the largest class of assets.
PP&E items are commonly grouped into classes, which are groups of assets having a similar nature and use. Examples of PP&E classes are buildings, furniture and fixtures, land, machinery, and motor vehicles. Items grouped within a class are typically depreciated using a common depreciation calculation.
When recording an item within PP&E, include in its cost the purchase price of the asset and related taxes, as well as any related construction costs, import duties, freight and handling, site preparation, and installation.
If a company produces machinery (for sale), that machinery does not classify as property, plant, and equipment. The machinery used to produce the machinery for sales is PP&E, but the machinery manufactured for sale is classified as inventory. The same goes for real estate companies that hold building and land under their assets. Their office buildings and land are PP&E, but the houses they sell are inventory.
Capital Expenditures (often referred to a CapEx for short) are what add to the net property, plant and equipment balance on the balance sheet. When the company spends money investing in either (1) updating and maintaining existing equipment, or (2) purchasing new additional equipment, this adds to the total balance on the balance sheet. What is Property, plant and equipment?
The nature of PP&E assets is that some of these assets need to be regularly fixed or replaced to prevent equipment failures or to adopt a more sophisticated technology. For example, it is normal for companies to repair or replace old factories or automobiles with new assets when necessary. The general rule in accounting for repairs and replacements is that repairs and maintenance work are expensed while replacements of assets are capitalized. Repairs are easy to record; it is simply a debit to repair or maintenance expense and a credit to cash. Replacements, however, are a bit more complicated. For replacements, the old cost of the asset is de-recognized from the company’s books and the cost of the new replacement is recorded/recognized. What is Property, plant and equipment?
Depreciation reduces the value of property, plant, and equipment on the balance sheet as the value of assets is lowered over time due to wear and tear and the reduction of their useful life. The depreciation expense is used to reduce the value of the net balance and it flows to the income statement as an expense. Not so very often property. plant and/or equipment has to be impaired because the recoverable amount is lower than the carrying amount (costs less depreciation) in the balance sheet.