Property, Plant and Equipment
Property, plant and equipment (PPE) are the long-term tangible assets that are shown on the balance sheet of the company. The company recognizes an asset as an item of PPE when the asset has a useful life for more than one year and it is used for production or supply of goods or services, for rental to others, or for administrative purposes.
Property, plant and equipment include land, building, machinery, vehicles, office equipment and furniture, etc.
Cost of Property, Plant and Equipment
The company records an item of property, plant and equipment initially at its cost in the accounting record. It includes all costs that necessary to bring the asset to the working condition that it can be used as intended.
The cost of an item of PPE includes purchased price, import duties, and the costs to get assets to the location and condition ready to use such as transportation and installation cost, etc.
Accounting entry for PPE
Depreciation of Property, Plant and Equipment
Depreciation is the process of spreading the cost of assets over its useful life. After the company record the item of PPE in the accounting record, it will need to be depreciated as the time passed (e.g. monthly or yearly, etc.). In this case, depreciation of PPE will need to reflect its useful life and the benefits that the company receives from the PPE.
Depreciation of PPE is recorded in the income statement as depreciation expense, in which it usually reflects the duration that the company uses the PPE and the economic benefits that the company receives from it.
Accounting entry for depreciation of PPE
Example of Accounting for PPE
For example, the company ABC bought a delivery truck for $45,000 (using cash) to use in the company. The company plans to use the truck for 5 years and expects to sell the truck for $5,000 after 5 years.
In this case, the truck would be recognized as PPE because it will be used for longer than one year.
The accounting entry for the truck would be:
The depreciation amount of the first year and the next four years would be : (45,000-5,000)/5 = 8,000
The accounting entry for the depreciation of the truck would be:
|Depreciation expense – truck||8,000|
|Accumulated depreciation – truck||8,000|
Note: this is the use of straight-line method to calculate depreciation of the truck. There are several other depreciation methods that may be used to depreciate the PPE, including declining balance, units of production, and sum of the years’ digits, etc.
Disposal of Property, Plant and Equipment
Disposal of an asset of property, plant and equipment is the process of removing the cost of the asset and its accumulated depreciation from general ledger, by selling or writing off the asset during or at the end of its useful life, so that it is no longer shown on the balance sheet.
This is known as the derecognition of PPE. In this case, the company needs to record in the income statement any amount of gain or loss resulting from the disposal of the PPE.
Gain or Loss on Disposal of PPE
If an asset of PPE is sold at the amount higher than its carrying amount or net book value (cost – accumulated depreciation) at the date of the sale, the excess of the proceeds from selling the fixed asset over its net book value is recognized as gain on disposal in the income statement which is income.
Sale Amount > Net Book Value => Gain
Otherwise, if it is sold at the amount less than net book value, the net amount difference between its net book value and the sale amount will be recorded as loss on disposal in the income statement which is an expense.
Sale Amount < Net Book Value => Loss
Accounting entry for gain on disposal of PPE
|Gain on disposal of PPE item||000|
Accounting entry for loss on disposal of PPE
|Loss on disposal of PPE item||000|
Example of Disposal of PPE
With the above example that company ABC bought a delivery truck for $45,000 to use in the company. After four years, the company decided to sell the truck for $ 17,000.
After four years, the accumulated depreciation of the truck was $32,000 and its net book value is $13,000.
In this case, the company sold for $17,000 which is $4,000 higher than the net book value, so the accounting entry is as below:
|Accumulated depreciation – truck||32,000|
|Gain on disposal of truck||4,000|