PP&E (Property, Plant and Equipment)

Fixed, tangible assets

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

Property, Plant and Equipment (PP&E) are non-current capital assets on the balance sheet of a business used to generate revenues and profits.  PP&E plays a key part in the financial planning and analysis of a company’s operations and future expenditures, especially with regards to capital expenditures.

 

PP&E

 

The PP&E account is often denoted as net of accumulated depreciation. This means that, if a company does not purchase new equipment (capital expenditures is zero), Net PP&E should slowly decrease in value every period due to depreciation. This can be better determined through the depreciation schedule.

PP&E, as a fixed asset account, is generally very illiquid. A company can sell it’s equipment, but not as easily as its inventory. The value of PP&E between companies will vary with the operations. For example, a construction company will generally have a higher property, plant and equipment balance than an accounting firm.

 

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

Property, plant and equipment will include any of a company’s long-term, fixed assets. PP&E assets are tangible, identifiable, physical and expected to generate an economic return for the company for more than one year, or one operating cycle (whichever is longer). The account can include machinery, equipment, vehicles, buildings, land, office space, office equipment, and furnishings, among others. Note that, of all these asset classes, land is generally one of the only assets that does not depreciate over time.

If a company produces machinery (for sale), that machinery does not classify as property, plant and equipment. The machinery used to produce the machinery for sales is PP&E, but the machinery for sale will be classified as inventory. The same goes for real estate companies that hold building and land under their assets. Their office buildings and land are PP&E, but apartments they sell are inventory.

 

PP&E Formula

Net PP&E = Gross PP&E + Capital Expenditures  – Accumulated Depreciation

To illustrate:

In the month of May 2017, Factory Corp. had machinery worth with a gross worth of $5,000,000. Accumulated depreciation for the same machinery was at $2,100,000. Due to the wear and tear of the machinery, the company decided to purchase another $1,000,000 in new equipment. For this period, the depreciation expense for all old and new equipment is $150,000.

Thus, the ending balance is $3,750,000. This is found by taking $5,000,000 + $1,000,000 – $2,100,000 – $150,000.

 

Capital expenditures

As the above formula shows, capital expenditures are what add to the net property, plant and equipment balance on the balance sheet.  When the company spends money investing in either (1) updating and maintaining existing equipment, or (2) purchasing new additional equipment, this adds to the total balance on the balance sheet.

 

Depreciation

The other major component of the formula above is depreciation and amortization.  Depreciation reduces the value of property, plant and equipment on the balance sheet as the value of assets are lowered over time due to wear and tear and the reduction of their useful life.  The depreciation expense is used to reduce the value of the net balance and it flows to the income statement as an expense.

 

Learn more about the Balance Sheet!

We hope this has been a helpful guide to understanding property, plant and equipment.  To keep learning and advancing your career, we highly recommend these additional resources below: