What are Plant Assets?
A plant asset, also known as a fixed assetFixed AssetFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples., is an asset whose benefit is spread out for more than a year, in terms of helping businesses generate revenue and carrying out the main operations for which it has been established.
Points to be noted down for plant assets are-
- They are recorded at cost, and
- They are depreciated over the estimated useful lifeEstimated Useful LifeUseful life is the estimated time period for which the asset is expected to be functional and can be put to use for the company’s core operations. It serves as an important input for calculating depreciation for assets which affects the profitability and carrying value of the assets., or actual useful life, whichever is lower.
- If required, impairment loss needs to be booked when the estimated realized value of the asset is less than the actual depreciated costDepreciated CostDepreciated cost refers to the current worth of a fixed asset after assimilating its used-up value. It is the leftover fixed asset value after deducting the accumulated depreciation from its original cost. appearing in the books.
Types of Plant Assets
They can be categorized into several categories, depending upon the requirements of the organization. Broadly speaking, the most common examples of fixed assets are:
- Land – The land is the only asset that is not depreciated; its value remains intact over the business tenure.
- Land Improvements – When the expenditure incurred is related to enhancing the usability of the land. It should be booked as a plant asset, and if it is practically feasible to estimate the useful life, then they should be depreciated.
- Buildings – It is one of the most common examples of plant assets or fixed assets. They can be either purchased or taken on leaseLeaseLeasing is an arrangement in which the asset's right is transferred to another person without transferring the ownership. In simple terms, it means giving the asset on hire or rent. The person who gives the asset is “Lessor,” the person who takes the asset on rent is “Lessee.”, depending upon the fund availability with the company.
- Machinery – These are the assets, which help the company to produce something. They are installed in the factories, and the wear and tear are larger in such cases due to the usage.
- Office Equipment – Inverters, racks, tables, chairs, etc., fall under this category, and they need to be grouped for convenience purposes. It is not an exhaustive list, and the company can further categorize its assets, depending on its requirements and accounting policies.
Examples of Plant Assets
A company acquires the land from the third party for $10,000. But due to the hilly area and crooked path, leveling is being done, which costed the company for around $3,000. After leveling, now the company is planning to use this as a parking space, and for this, it installs fences amounting t0 $9,000 around the perimeter.3
As per the practical scenario, fences would last for the next 30 years.
|Acquisition of Land|
|Levelling of the Land|
The last entry would be posted every year for the next 30 years, resulting in nil value at the end of the useful life offenses.
Depreciation of Plant Assets
Depreciation is the wear and tear of the asset, which occurs due to its daily usage. In loose terms, the difference between the salvage value and the actual cost of the asset is known as depreciation. There are different ways through which a company can provide for reducing the cost of the asset.
- #1 – Straight Line Depreciation MethodStraight Line Depreciation MethodStraight Line Depreciation Method is one of the most popular methods of depreciation where the asset uniformly depreciates over its useful life and the cost of the asset is evenly spread over its useful and functional life. – Also known as the fixed installment method, this model suggests putting an equal charge for depreciation in each of the accounting periods.
- #2 – Written Down Value MethodWritten Down Value MethodThe Written Down Value method is a depreciation technique that applies a constant rate of depreciation to the net book value of assets each year, resulting in more depreciation expenses recognized in the early years of the asset's life and less depreciation recognized in the later years of the asset's life. – Also known as the declining balance method, this model uses a fixed percentage of the depreciation and applies it on the net balance to derive the charge. In the initial years, the charge would be greater, and as time passes, it gets reduced, that’s why it is known as reducing balance method.
- #3 – Sum of Years Digit Method – This method propagates to charge the depreciable amount of an asset to a fraction in different accounting periodsAccounting PeriodsAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.. It works on the assumption that in the initial years, the benefit would be more as the machine is new, and as it moves towards the obsolescence, the benefit derived would be less, resulting in less charge and less burden on the profitability.
Other methods are –Double Declining Balance MethodDouble Declining Balance MethodThe Double Declining Balance Method is one of the accelerated methods used for calculating the depreciation amount to be charged in the company's income statement. It is determined by multiplying the book value of the asset by the straight-line method's rate of depreciation and 2, Insurance Policy Method, Unit Production Method, etc. It would depend upon the company accounting policiesAccounting PoliciesAccounting policies refer to the framework or procedure followed by the management for bookkeeping and preparation of the financial statements. It involves accounting methods and practices determined at the corporate level., management, and expected usage of the asset, to opt for the suitable depreciation method.
Examples of Plant Asset Depreciation
Depreciable Value = Cost of the Plant – Salvage Value
Hence, in this case, it would be 10,000(-) 2,000 = 8,000.
#1 – Straight Line Method
Here, points to be noted with respect to depreciation are –
- Depreciation remains constant every year.
- At the end of the asset life, the residual valueResidual ValueResidual value is the estimated scrap value of an asset at the end of its lease or useful life, also known as the salvage value. It represents the amount of value the owner will obtain or expect to get eventually when the asset is disposed. remains in the books.
|Year||Value as on January||Depreciation||Value as on December|
#2 – Written Down Value Method
Observe the movement from the table-
- Depreciation is higher in the initial years and is in the falling stage as the year passes.
- It is not constant as it was observed in the straight-line method.
|Year||Value as on January||Depreciation||Value as on December|
#3 – Sum of Digit Method
Sum of Digits is calculated in the following manner –
1+2+3+4+5 = 15
|Year||Value as on January||Remaining Useful Life||Depreciation Fraction||Depreciation Expense||Value as on December|
Calculation of Cost of Plant Assets
Investment in plant assets comes under strategic planning and occupy the major budget of the companies. Capitalization of plant assets should include the following:
|Cost Incurred to make the Asset Ready for use||XX|
The cost incurredThe Cost IncurredIncurred Cost refers to an expense that a Company needs to pay in exchange for the usage of a service, product, or asset. This might include direct, indirect, production, operating, & distribution charges incurred for business operations. would include legal fees, commissions, borrowing costs up to the date when the asset is ready for use, etc., are some of the examples.
As it involves heavy investment, proper controls should be put in place to secure the assets from damage, pilferage, theft, etc. Controls should be monitored by the top management regularly, and if there are any discrepancies, they should be corrected immediately to prevent further loss to the company as a whole.
This article has been a guide to What are Plant Assets & its Definition. Here we discuss formula to calculate the depreciation value along with types and examples. You can learn more about from the following articles –