What is PPE in accounting, anyways? PPE stands for property, plant, and equipment. PPE is a term used in accounting to refer to the long-term assets of a company that are used in the day-to-day operations of the business. This typically includes items such as buildings, machinery, vehicles, and furniture.
PPE is considered to be a key part of a company’s balance sheet, as it can represent a large portion of the value of a business. For this reason, it is important for investors and creditors to understand how PPE is accounted for on a company’s financial statements.
Keep reading to learn more about what PPE is in accounting and other related insights.
Property, Plant, and Equipment Balance Sheet Insights
There are two main ways that PPE can be accounted for on a balance sheet: the cost model and the revaluation model.
Under the cost model, PPE is recorded at its historical cost. This means that any changes in the value of PPE due to inflation or other factors are not reflected on the balance sheet. The main advantage of this method is that it is simple and easy to understand. However, it can lead to understated or overstated values on the balance sheet.
Under the revaluation model, PPE is recorded at its current market value. This means that any changes in the value of PPE are reflected on the balance sheet. The main advantage of this method is that it provides a more accurate picture of a company’s PPE. But it can be more difficult to understand and requires more frequent updates.
The cost model is the most commonly used method for accounting for PPE. However, the revaluation model is gaining popularity in recent years.
Loving this post? Make sure to check out our other article about hedging in accounting before you go!
PP&E Accounting Examples
Examples of PP&E include buildings, land, machinery, and vehicles. To account for PP&E, businesses use the cost model. The cost of an asset is its original purchase price plus any associated costs to get it into its current usable condition.
Over time, the value of PP&E assets can go up or down due to changes in market conditions. When the value of an asset goes down, businesses may record an impairment charge on their income statement.
Accounting for property, plant, and equipment can be complex. Businesses must determine the costs of PP&E assets, allocate those costs to accounting periods, and adjust the carrying value of assets when market conditions change.
The best way to learn how to account for PP&E is to see some examples. The following two examples show how businesses might account for the purchase and sale of PP&E assets.
Example 1: Purchase of PP&E
On January 1, 2023, ABC Company buys a factory for $2 million. The factory has an expected life of 10 years and will be used to produce widgets. ABC Company allocates the cost of the factory evenly over its 10-year life and records $200,000 of depreciation expense each year for 10 years.
On December 31, 2023, ABC Company’s balance sheet would report the factory as follows:
Factory
$2,000,000
less: Accumulated depreciation
$2,000,000
$0
Example 2: Sale of PP&E
On January 1, 2023, XYZ Company buys a machine for $100,000. The machine has an expected life of 10 years and will be used to produce widgets. XYZ Company allocates the cost of the machine evenly over its 10-year life and records $10,000 of depreciation expense each year for 10 years.
On December 31, 2023, XYZ Company’s balance sheet would report the machine as follows:
Machinery
$100,000
less: Accumulated depreciation
$10,000
$90,000
On January 1, 20X2, XYZ Company sells the machine for $75,000.
When PP&E assets are sold, businesses must remove the asset from their balance sheet and recognize any gain or loss on the sale. In this example, XYZ Company would record a $15,000 gain on the sale of the machine.
The accounting for PP&E can be complex, but it is important to understand the basics. By understanding how to account for PP&E, businesses can make better decisions about when to buy or sell assets and how to allocate costs.
Property, Plant, and Equipment Current or Noncurrent Asset?
PPE is classified as a noncurrent asset on the balance sheet. Noncurrent assets are assets that are not expected to be converted into cash within one year. PPE is expected to be used for more than one year and, as such, is classified as a noncurrent asset.
PPE can be further classified as either intangible or tangible property. Tangible property is a property that has a physical form and can be seen or touched. Intangible property is a property that does not have a physical form and cannot be seen or touched. Examples of intangible property include goodwill, patents, and copyrights.
PPE FAQ
What assets are PPE?
Property, plant, and equipment are PPE assets. These are the physical or tangible long-term assets that are capable of being used for beyond a year.
What type of account is PPE?
PPE is a fixed asset that appears as a line item in the non-current assets section of a balance sheet. It’s called property, plant, and equipment, or PP&E.
Is PPE an asset liability or equity?
PPE is an asset. Property, plant, and equipment are long-term assets that a company uses to generate revenue.
How do you record PPE in accounting?
Recording PPE acquisitions in accounting involved capitalizing them throughout the useful life of each asset that is usable for over a year. This information is typically determined by taxpayers.
Is PPE credit or debit?
An item of PPE involves the purchased price, costs to get assets to the location and condition ready for use, and import duties. This is listed as debit as opposed to credit.
Does PPE go on income statement?
PPE isn’t included on an income statement. The assets of a company are increased and cash is reduced with the purchase of PPE. These are elements included in the balance sheet as opposed to an income statement.
