Property Plant And Equipment Definition
Property Plant and Equipment Definition – “A line on the balance sheet indicating how much money (after depreciation) a company has invested in fixed assets such as buildings and machinery”
These are the most important resources of the company as they results in producing the products for it. These items appears on the assets side of Balance Sheet at their cost value. However, accumulated depreciation is subtracted in order to record property plant and equipment at their actual cost.
This is because, assets are recorded in Balance Sheet at their historic costs, that is the price at which the assets acquired. But with the time, these assets value decline due to usage, obsolescence, etc. Therefore every year depreciation is charged on such assets and is subtracted from the historical costs of the assets.
PPE comes under long term assets under the Assets head of Balance Sheet. In addition to this, land is also included in these assets. However in case of land, there is appreciation.
Property Plant And Equipment Example
In order to understand property plant and equipment definition more clearly, let’s discuss an example.
ABC company is oil refinery firm which decided to purchase a new plant for the refining purpose costing Rs. 50,00,000. After purchasing it invest Rs 3,00,00 for doing some modification. The life of the plant is 10 years. Calculate the book value of the plant for the 3rd year to be shown in the Balance Sheet. The salvage value is Rs. 15,00,000. Use straight line method to calculate depreciation.
Accumulated Depreciation = 50,00,000 – 15,00,000
Depreciation in Year 1 = 35,00,000/10
Book Value for Year 1 = 35,00,000 – 3,50,000
Similarly depreciation for Year 2 = 3,50,000 +3,50,000
Book Value = 35,00,000 – 7,00,000
Depreciation for 3 Year = 3,50,000 +3,50,000 + 3,50,000
Book Value for third year = 35,00,000 – 10,50,000