What is property, plant, and equipment?

Definition

Property, plant, and equipment gathers the long-lived physical assets a shop uses to operate. On the books, this is a section of non-current assets, not a single account and not an expense on the day you buy.

The items in this section are bought to run the business for years. They are not goods held as inventory for the next customer.

Land sits in the same grouping as buildings and machines. Land does not depreciate; the depreciable pieces do.

Where it shows up

Balance Sheet: Located below current assets, with the long-lived items.

P&L: Related to depreciation on the depreciable pieces, not on land.

Cash flow: Increases in this section, reported cash from investing activities decreases.

See also: Fixed Assets · Accumulated Depreciation · Non-Current Assets

When you look at your Balance Sheet, PP&E sits below current assets, with the long-lived items. Many packs show it net of accumulated depreciation, so you see remaining book amount rather than original cost.

A high total can mean a building, lanes, trucks, or heavy machines. A low total can mean the business rents its space and tools, or that older items are mostly worn down on the books.

The profit and loss statement does not list this section. Depreciation on the depreciable pieces is the related P&L charge; land has none.

On the Statement of Cash Flows, buying into this section is an investing outflow. Cash falls, this section rises, and the P&L does not take the full cost that day.

How it works

A purchase lands here when it will serve more than a year and it passes the capitalization threshold. The debit hits land, building, or equipment; the credit hits cash or accounts payable.

Fixed assets are the everyday name for these same physical items. This grouping is the statement label that holds them together.

Land is recorded at cost and usually stays there. Buildings, machinery, vehicles, and equipment then depreciate over the years they are used.

Each period, depreciation expense takes a slice of those depreciable costs. Accumulated depreciation holds the total taken so far, and net book value is cost minus that total.

Leasehold improvements can sit near this grouping when you capitalize upgrades to a rented space. They are still long-lived, even though you do not own the building.

The section grows when you buy or improve items. It shrinks when you sell or retire them, at which point you remove both cost and accumulated depreciation.

Keep a register that lists each item, not just a lump. A pinsetter still on the lanes should be on that list; a pinsetter that was scrapped should not.

Spending that adds to this section is a capital expenditure. Paying to keep a machine running for this month is usually a repair, not an addition to the grouping.

Example

A bowling alley groups the building, the lanes, and the pinsetter under property, plant, and equipment. The land under the lot sits in the same grouping, at cost, and it does not depreciate.

This month the alley buys a replacement pinsetter for $6,000 cash.

The alley records:

Debit: Property, plant, and equipment $6,000

Credit: Cash $6,000

The grouping goes up by $6,000, and cash goes down by $6,000. The P&L does not show a $6,000 expense that day.

The Balance Sheet mix changes; total assets stay the same. Depreciation will later touch the pinsetter and the building, not the land.

Common mix-ups

Property, plant, and equipment is not the same as current assets. Inventory and receivables should turn this year; a bowling lane should not.

Land is not depreciated just because it sits in this grouping. Buildings and machines wear on the books; land usually does not.

This grouping is not the same as net book value. The section holds cost; net book value is that cost minus accumulated depreciation.

Related terms

• Fixed Assets: Long-lived physical assets used to run the business rather than resold.
• Accumulated Depreciation: The contra-asset account holding all depreciation taken on assets to date.
• Net Book Value: An asset's original cost minus the depreciation recorded against it.
• Depreciation Schedule: The supporting schedule listing each asset, its cost, life, and depreciation to date.
• Capital Expenditures: Spending to buy or improve long-lived assets.
• Leasehold Improvements: Capitalized upgrades made to a rented space.
• Non-Current Assets: Assets the business expects to hold and use for more than a year.
• Asset Disposal: Removing an asset and its accumulated depreciation from the books when it is sold or retired.