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What Is A Plant Asset? Here’s Everything You Should Know

what are plant assets

Plants are considered a “current asset” because PP&E has a useful life longer than one year. A plant is a physical object that can be used to produce a product or service. However, it is still included as a tangible asset on the balance sheets of the companies that own and operate the plants.

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.

What are the four characteristics of plant 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 This classification is rarely used, having been superseded by such other asset classifications as Buildings and Equipment.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 https://www.kelleysbookkeeping.com/what-is-job-order-costing/ 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.

The resources owned by the company are called its assets. On the other hand, the borrowed money is the liability or obligation for the business entity. There are different methods of depreciation that a business entity can use. Many business entities use different 3 ways to do time value money calculations depreciation methods for financial reporting and tax purposes. In the same way, a company can sell its assets to a third party and use them for its own benefit. This is called an “asset sale,” and it is not considered to be a sale of a tangible asset.

what are plant assets

Plant assets (other than land) are depreciated over their useful lives and each year’s depreciation is credited to a contra asset account Accumulated Depreciation. Monte Garments is a factory that manufactures different types of readymade garments. The company also has a printing press for printing customized merchandise with brand designs. A new press technology has just launched in the market, and the company owner decided to acquire the machine. The cost of the machine is USD100,000, and it is expected to stay useful for five years with a residual value of USD10,000.

Main Purposes of Financial Statements (Explained)

In addition, plant assets that are used for the production of goods or services are not considered to be assets of a particular business. Plant assets are a specific type of asset on a company’s balance sheet. An asset is anything that can be owned or used to produce value, and can also be used for other purposes. For example, the value of a factory is the amount of value it can produce. When a plant asset is acquired by a company that is expected to last longer than one year, it is recorded in the balance sheet at the end of the financial year. Besides, a part of the asset’s cost is charged to expenses account as a non-cash expense, depreciation.

The cost is also functional in that the customer will have to pay for the physical change in location. In the case of an automobile, functional depreciation occurs when the vehicle is no longer being used for its original purpose. For instance, a car that has been sitting in a garage for 20 years may be sold for $10,000, but the new owner will not be able to drive it because it is too old. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. As for buildings, per IRS rules, non-residential buildings can be depreciated over 39 years using the Modified Accelerated Cost Recovery System (MACRS) method of depreciation.

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.

  1. In the same way, a company can sell its assets to a third party and use them for its own benefit.
  2. The name plant assets comes from the industrial revolution era where factories and plants were one of the most common businesses.
  3. The bookkeeper would record the transaction by debiting the plant assets account for $100,000 and crediting the cash account for the same.
  4. With inventory, we saw a direct match between the cost of the product and the sales revenue.
  5. The major characteristics of plant assets are that they are acquired for use in operations and not for resale, that they are long-term in nature, and that they have physical substance.

The only exception is land, which does not have a limited useful life, so cannot be depreciated. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com. The same process will be repeated every year at the end of the financial year.

Property, plant, and equipment are recorded in a company’s balance sheet and need to be calculated appropriately. In this article, we’ve explained the concept of plant assets in very detail. We hope you’ll know the difference between plant assets and other non-current assets and the accounting treatment. The third type of method is the sum of years digit method.

If the equipment or machinery in question is a necessary part of your business operation, it’s a plant asset. Tom’s Machine Shop is a factory that machines fine art printing presses. One of the CNC machines broke down and Tom purchases a new machine for $100,000.

What is the difference between assets and plant assets?

Plant assets, also known as fixed assets, are any asset directly involved in revenue generation with a useful life greater than one year. Named during the industrial revolution, plant assets are no longer limited to factory or manufacturing equipment but also include any asset used in revenue production. Plants are long-term fixed assets that are used to make or sell products and services. These assets are projected to be beneficial to a business for more than a year. The value of a plant asset is determined by a number of factors, including the expected life of the asset, the cost of maintenance and repair, and the amount of capital invested in the plant. Any asset that will provide an economic benefit within one year is a current asset.

What are Plant Assets?

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.

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 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.

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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