Definition
Plant assets, also known as fixed or long-term assets, refer to the tangible assets that a company uses in their operations which they expect to use for more than one accounting period. These assets typically include land, buildings, machinery, vehicles, and furniture. Plant assets are significant because they are used to produce the goods and services that a company sells.
Key Takeaways
- Plant Assets, also known as Property, Plant, and Equipment (PP&E), are long-term tangible assets that a business uses in its operation to generate income and are not intended for sale.
- These assets usually undergo depreciation over their useful life, which is the process of allocating the cost of the asset over the periods it is supposed to provide benefits or returns.
- Investments in plant assets can significantly impact a company’s financial status, as they involve large capital expenditures and affect both the balance sheet and income statement.
Importance
Plant assets, also known as property, plant, and equipment (PP&E), represent a crucial aspect of a company’s balance sheet.
These are long-term tangible assets utilized in the production or supply of goods and services, for rental to others, or for administrative purposes.
They significantly contribute to the company’s productivity and profitability.
Depreciation of plant assets over their useful life becomes a factor that can substantially impact a firm’s value and tax situation.
Hence, proper management and assessment of plant assets are key to maintaining financial health and long-term sustainability in a business.
Explanation
Plant assets, often referred to as property, plant, and equipment (PP&E), are long-term assets that are vital for a company’s operation and revenue generation. They are known to have a useful life of more than one year and chiefly cater to the production, supply, administrative functions, and rental activities of an organization. These assets include land, buildings, machinery, office equipment, vehicles, furniture, and fixtures.
Particularly in manufacturing or production-oriented companies, plant assets are critical as they are the main source of their productivity and income generation. The purpose of plant assets largely revolves around their contribution to the company’s productive output. They are not meant for immediate sale but are instead used continually to manufacture products, provide services, rent to others, or for administrative purposes.
Through their use, plant assets allow a company to generate revenue over several periods. Correspondingly, the cost of plant assets is allocated to multiple accounting periods through depreciation (with exception of land). This allocation is imperative for accurate representation of a company’s financial health. These assets also represent a significant investment committed to the company’s operations helping analysts and potential investors understand the company’s business strategy.
Examples of Plant Assets
Real Estate Property: Purchase of a building, land, or office space is a common example of a plant asset. For instance, when Starbucks acquires a new property to open a coffee shop, that property becomes a plant asset on their balance sheet. It’s a long-term tangible asset that can be used over several years to generate revenue.
Machinery and Equipment: In the manufacturing sector, plant assets often refer to things like machines, conveyor belts, or assembly lines. For example, a car manufacturer like Ford Motor Company has numerous plant assets in the form of manufacturing equipment and machinery to produce various car models.
Furniture and Fixtures: Fixtures within a company office, retail store, or restaurant could also be categorized as plant assets. For example, the tables, chairs, and booths that a restaurant like McDonald’s uses in its day-to-day operations are considered plant assets. These are items that have a useful life beyond one year and are used in the running of the business.
Frequently Asked Questions about Plant Assets
What are Plant Assets?
Plant Assets, also known as Property, Plant, and Equipment (PPE), are long-term assets that a company uses in its production or goods, services, or as administrative purposes. They are one of the core parts of a business operation and are essential for a company to deliver its goods and services.
What is included in Plant Assets?
Items included in Plant Assets are factories, machinery, office buildings, land, and vehicles. Basically, any tangible asset used in the operation of a business can be considered a part of Plant Assets.
How are Plant Assets recorded?
Plant Assets are recorded at their historical cost, and this cost includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use. It is capitalized on the balance sheet, instead of being expensed in the income statement.
How are Plant Assets depreciated?
Except for land, Plant Assets are depreciated over their useful life. This means that the cost of the asset will gradually be expensed over the years that the asset is being used.
What happens when a Plant Asset is sold?
When a Plant Asset is sold, it is removed from the balance sheet. Any gain or loss from the sale is calculated as the difference between the sale price and the asset’s book value at the time of the sale, and is reported in the income statement.
Related Entrepreneurship Terms
- Depreciation
- Capital Expenditures
- Fixed Assets
- Tangible Assets
- Asset Lifespan
Sources for More Information
- Investopedia: This website covers a wide range of financial topics, including plant assets. It’s widely recognized for its in-depth explanations and guides.
- Accounting Tools: Accounting Tools is a reliable resource for a wide range of financial and accounting concepts, including plant assets.
- Corporate Finance Institute: CFI offers a range of online certification courses in financial analysis, accounting, Excel, and more. Their resources could provide valuable insights into plant assets.
- Accounting Coach: This website provides free educational content on a variety of accounting topics, including plant assets. It’s beneficial for beginners and those who want to expand their knowledge.
