Introduction to Plant Assets Financial Accounting

The percentage for charging depreciation is pre-decided and fixed. Every year, the percentage is applied to the remaining value of the asset to find depreciation expense. In the initial years of the asset, the amount of depreciation expense is higher and decreases as time passes. Therefore, this method is called as declining balance method. The non-current assets are the company’s long-term assets that last for many years and deliver economic benefit. There is a further classification of tangible and intangible non-current assets.

They must also be reviewed for impairment at regular intervals. This classification is rarely used, having been superseded by such other asset classifications as Buildings and Equipment. These assets can be used to produce revenues, but they can also be sold or disposed of at a later date. For example, if a company sells a plant to a third party, the plant is no longer considered a fixed asset and is not included in the company’s balance sheet. What these assets all have in common, that also differentiates them from current assets, is that they are not going to turn into cash any time soon and their connection to revenue is indirect.

With inventory, we saw a direct match between the cost of the product and the sales revenue. We call that a product cost, as opposed to a period cost. Rent, insurance, and wages are examples of period costs that we match to revenues by posting them to the income statement accounts in the same period as the revenue, using time as our method of matching.

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Click here to read our full review for free and apply in just 2 minutes. Let’s take another look at The Home Depot, Inc. balance sheet as of February 2, 2020. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.

It is also called a fixed-installment method, as equal amounts of depreciation are charged every year over the useful life of an asset. If you buy a piece of land for $1,000 and then decide to sell it at $2,500, the land will be depreciated over the life of the contract. This is because the price you paid for the property what does it mean when a company has a high fixed is based on the market value at the time you bought it, not the actual value when you sold it. As we continue to walk our way down the balance sheet, we come to noncurrent assets, the first and most significant of which is PP&E. At almost $23 billion, PP&E composes almost half of the total assets of $51 billion.

The actual use of a plant asset is what causes physical depreciation. Functional depreciation is caused by obsolescence factors such as technological advances and less demand for a particular product or service. For example, if a company sells a new car to a customer, the cost of the car is physical in the sense that it has to be physically moved from one location to another. Plant assets are different from other non-current assets due to tangibility and prolonged economic benefits. Plant assets are reported within the property, plant, and equipment line item on the reporting entity’s balance sheet, where it is grouped within the long-term assets section.

1. The later years are charged a lower sum of depreciation based on the assumption that lower revenue is generated.
2. Fixed assets can be used for a variety of purposes, such as building a house, buying a car, or renting a room in a hotel.
3. Any asset that will provide an economic benefit within one year is a current asset.
4. Plants are long-term fixed assets that are used to make or sell products and services.
5. For example, a new plant may be valued at $100,000, but if it is expected to last 10 years, it may cost $1 million to build and maintain.
6. There are different methods of depreciation that a business entity can use.

For example, if you buy a house, you can use it to live in, but you cannot use the house to make a profit. Therefore, the first few years of the assets are charged to higher depreciation expenses. The later years are charged a lower sum of depreciation https://www.kelleysbookkeeping.com/law-firm-accounting-the-ultimate-guide/ based on the assumption that lower revenue is generated. Every business concern or organization needs resources to operate the business functions. The resources are sometimes owned by the company and sometimes borrowed by external parties.

Which of the following is an example of a plant asset?

The best way to manage your assets is to use an accounting software application that simplifies the entire asset management process from the initial acquisition to asset disposal. Plant assets are deprecated over their useful lives using the straight line or double declining depreciation methods. In addition to the products described in paragraph 2(a), the Company also produces and sells a broad range of non-agricultural products and services. If you picture a business as a process that creates wealth for the owners, PP&E are the physical machine. Left by themselves, PP&E just sit there, but put into action by people with energy and purpose, they become a money-making machine. The most efficient use of these resources maximize profit.

As the fixed assets last longer, the expenses are divided over the item until they’re useful. The IAS 16 of the IFRS governs the rules regarding recognizing and recording the plant assets in the company’s financial statements. Instead, a part of the cost is periodically charged to the expense account to depreciation the plant assets.

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Current assets are liquid assets that quickly change into cash. It includes cash/bank, short-term securities, inventories, account receivables, etc. It’s impossible to manufacture products without equipment and machinery, or a building to house them.

The presentation may pair the line item with accumulated depreciation, which offsets the reported amount of the asset. Since these assets produce benefits for more than one year, they are capitalized and reported on the balance sheet as a long-term asset. This means when a piece of equipment is purchased an expense isn’t immediately recorded. Instead, the cost of the asset is allocated over its useful life. Tangible assets are the main type of assets that companies use to produce their product and service.