Property, Plant and Equipment

Definition

Property, plant and equipment are tangible asset which are held by entity for use in production or supply of goods and services, for rental to other, for administrative purposes, and are expected to be used during more than one period.

Valuation and Classification

 Property, plant and equipment are generally carried at cost less allowance for depreciation. When classified balance sheet is presented, property, plant and equipment should be reflected as non-current asset.


Characteristic for defining property, plant and equipment


1. The property, plant and equipment are tangible asset meaning with physical substance

2. They are use in business, meaning used in production or supply of goods and services, for rental and administrative purposes.

* Property ordinarily not subject to depreciation such as land used as plant site.
* Property subject to depreciation such are building, machinery and equipment.
* Asset that held for sale include land or held for investment are not include in property, plant and equipment

3. They are expected to be used over a period or more than one year.

Depreciation

The process of systematically allocating the cost of property, plant and equipment expense over the period the asset used is depreciation. This process design to match the asset against the revenue generated over the asset life in accordance with the matching principle. It is a process of cost allocation and not valuation.

Depreciation can either be physical or technical. Physical depreciation is due to wear and tear, passage, of time, action of elements, accident or diseases. Technical depreciation arises from obsolescence or inadequacy.

Acquisition mode of new acquired asset (PPE)

1. cash purchase
2. credit purchase or purchase on account
3. installment purchase
4. issuance of securities
5. issuance of bonds payable


There are factors considered in determining amount of depreciation expense to be recognized each period.

* Asset cost

* Estimated useful life - is the estimated length of service expected from an asset. Useful life may be expressed in years, units of output and other measurement.

* Estimated salvage value - it is the expected cash value of asset or the amount that the asset can probably sold for at the end of its estimated useful life. This known also as residual value, scrap value or trade-in value.