Friday, October 9, 2009

Plant Assets, Long-Lived Assets, Fixed Assets, Plant-Propety-and-Equipment (PP&E)

Two construction workers at work.

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Plants Assets Plant assets are properties that have a physical substance (they occupy space and own a definite size and shape), and are used in the daily operations of a business. In contrast to merchandise, plant assets are not intended for sale to customers. In the development of Accounting, accountants have called these assets by different names: Long-lived assets, property, plant, and equipment (PP&E); plant and equipment; or fixed assets.

Historical Cost of Plant Assets

Plant assets must be recorded at cost --the initial price for which they were acquired-- in accordance with the cost principle of accounting. Once the historical cost in posted to the ledger, it cannot be changed, altered, deface, or distorted in any way. Cost includes all expenditures necessary to (1) acquire the asset, and (2) get it ready for its intended use.

Land

Land is a plant asset that includes the cash purchase price, closing costs such as title and attorney’s fees, real estate brokers’ commissions, and accrued property taxes and other liens on the land assumed by the purchaser. The peculiar feature of land is that it doesn’t depreciate.

Land improvements

Land is seldom a barren asset. Businesses make structural additions, such as driveways, parking lots, fences, landscaping, and underground sprinklers. The cost of land improvements includes all expenditures needed to make the improvements ready for their intended use.

Buildings

Buildings are assets that include all necessary costs related to its purchase or construction. 1. When a building is purchased, such costs include the purchase price, closing costs, and real estate broker’s commission. 2. The costs of remodeling and replacing or repairing the roof, floors, wiring, and plumbing must be counted and included in the total cost of the asset. 3. In the case of a new building is constructed, cost consists of the contract price plus payments for architects’ fees, building permits, interest payments during construction, and excavation costs.

Equipment

Equipment includes tools, furniture, and machinery. The purchase price, sales taxes, freight charges, insurance, cost of assembling, installing, and testing must be included as part of the historical cost.

Depreciation

Depreciation is the allocation of the cost of a long-lived asset to expense over its useful (service) life in a rational and systematic manner. a. The booking of depreciation expense provides for the proper matching of expenses with revenues as required by matching principle. b. During the physical life of a plant asset its usefulness may decline because of the fair, wear, and tear or obsolescence. c. Depreciation expense is an operating expense and it should not be viewed as a cash inflow for the replacement of the asset. Three factors affect the computation of depreciation: (1) cost, (2) useful life, and (3) salvage value; other names for salvage value are trade-in value, and scrap value.

Methods of Depreciation

The three most popular methods of recognizing depreciation are (a) straight-line, (b) units of activity, and (c) declining-balance. a. Each method is acceptable under generally accepted accounting principles. b. Once Management selects the method, the same method must be used year after year. However, should the company see that a different method is more convenient and favorable, the owner should apply to Internal Revenue Service for a change. c. The use of the same method consistently conforms to generally accepted principles and allows for comparability. In a classified balance sheet, long-lived assets appear under the title, “Plant, Property, and Equipment.”
The writing techniques I employ in this article are all explained in Mary Duffy's writing manual:

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