Property, Plant, and Equipment - Explained
What is Property, Plant, and Equipment?
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Table of ContentsWhat is Property Plant and Equipment?How is Property Plant and Equipment Used? How to Calculate Property, Plant, and Equipment (PP&E)
What is Property Plant and Equipment?
Property, plant, and equipment are otherwise called tangible assets. These are assets whose useful life is more than one year and are used for the production of products and services in a company. Property, plant, and equipment is a term used for assets that are not easily convertible to cash, such assets include machinery, buildings and facilities, trucks and vehicles, and heavy-weight equipment. These properties are also called physical or fixed assets, they can be used for a long time and are capital-intensive. The opposite of Property, plant, and equipment are current assets such as cash and cash equivalents and other liquid assets that can easily be converted into cash.
How is Property Plant and Equipment Used?
Property, plant, and equipment are assets that are illiquid and non-current. These assets are expected to have a useful life for more than a year, and also have carrying amounts and methods of depreciation. PP&E have a certain economic value they contribute to a company over their useful life, these assets can also be depreciated for accounting and tax purposes. The value of these fixed assets after their useful life has expired is called a scrap value or salvage value.
How to Calculate Property, Plant, and Equipment (PP&E)
Property, plant, and equipment are recorded in a company's balance sheet, it is, therefore, essential that these assets are calculated appropriately. The formula for calculating PP&E is;
- Net PPE = Gross PPE + Capital Expenditures - AD
- AD = Accumulated depreciation
The calculation of Property, plant, and equipment gives an insight into the spending culture of a company. Analysts and invests check this calculation to determine whether to invest in the company or not and how the assets contribute to the profitability of the company. Companies are also required to track their PP&E in order to determine which fixed asset should be changed or sold to generate income for the company's operation. Here are some key things to note about PP&E:
- Property, plant, and equipment (PP&E) are fixed assets that depreciate over time and cannot be easily converted to cash.
- Common examples of PP&E are plants, machinery, heavy-weight equipment, buildings, trucks and vehicles, and other long-term assets.
- PP&E, if properly managed, can add to the profitability of a company.
- PP&E is recorded on the companies balance sheet.
- Investors and analysts take note of the PP&E of a company to determine how profitable the company will be if invested in.
- Depreciation, Depletion, and Amortization
- How Reporting Depreciation for Tax is Unique? – Financial Accounting
- What happens when Depreciation Estimates Change? – Financial Accounting
- What are Capital Expenditures? – Financial Accounting
- How to Dispose of Plant Assets? – Financial Accounting