What is Property, Plant, and Equipment (PP&E)?

//What is Property, Plant, and Equipment (PP&E)?
What is Property, Plant, and Equipment (PP&E)? 2017-10-09T07:36:32+00:00

Definition: The property, plant, and equipment (PP&E) account, also known as tangible fixed assets, represents the non-current, physical, illiquid assets that are expected to generate long-term economic benefits for a firm including land, buildings, and machinery.

What Does Property, Plant, & Equipment Mean?

What is the definition of property, plant, and equipment? The PP and E account is important for the operations of a firm because it gives the company the resources necessary to produce its products. The value of PP&E depends on its age and original cost. All fixed assets are recorded at their purchase price and listed on the balance sheet at their historical cost. As time goes on, the assets are depreciated each period slowly decreasing their book value reported.

The total amount of property, plant, and equipment reported on the long-term assets section of the balance sheet includes items like buildings, equipment, furniture, and vehicles net of accumulated depreciation. It also includes land, which is not depreciated.

Let’s look at an example.

Example

A large poultry firm purchases a poultry farming plant for a cost of $35 million. The management has decided to make some changes at the installation site, reaching a total cost of $500,000, and to perform a site inspection for a cost of $350,000. The firm’s accountants estimate that the plant has a life of 12 years and a salvage value of $7 million. They are asked to calculate the book value of the fixed assets that will be reported on the Year 3 balance sheet using the straight-line depreciation method.

The accumulated depreciation for the PP&E is calculated as follows:

Total costs: $35,000,000 + $500,000 + $350,000 = $35,850,000

Accumulated Depreciation – $35,850,000 – $7,000,000 = $28,850,000

Depreciation in Year 1: $28,850,000 / 12 years = $2,404,167

Year 1 Book Value: $28,850,000 – $2,404,167 = $26,445,833

Depreciation in Year 2: $2,404,167

Accumulated depreciation in Year 2: $2,404,167 + $2,404,167 = $4,808,334

Year 2 Book Value: $28,850,000 – $4,808,334 = $24,041,666

Depreciation in Year 3: $2,404,167

Accumulated depreciation in Year 3: $2,404,167 + $2,404,167 + $2,404,167 = $7,212,501

Year 3 Book Value: $28,850,000 – $7,212,501 = $21,637,499

Summary Definition

Define Property, Plant, and Equipment: PP&E are fixed assets that a business uses to produce products and services in pursuit of making a profit.