Plant Assets

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.read more, 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-

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:

Plant-Assets

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For eg:
Source: Plant Assets (wallstreetmojo.com)

  1. Land – The land is the only asset that is not depreciated; its value remains intact over the business tenure.
  2. 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.
  3. 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.”read more, depending upon the fund availability with the company.
  4. 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.
  5. 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

You can download this Plant Assets Excel Template here – Plant Assets Excel Template

As per the practical scenario, fences would last for the next 30 years.

ParticularDebitCredit
Acquisition of Land
Land10,000
Cash/Bank10,000
Levelling of the Land
Land Improvements3,000
Cash/Bank3,000
Parking Lot
Land Improvements9,000
Cash/Bank9,000
Depreciation Entry
Depreciation300
Accumulated Depreciation300

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.

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 2read more, 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.read more, management, and expected usage of the asset, to opt for the suitable depreciation method.

Examples of Plant Asset Depreciation

Plant Assets Example 1-1

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 –

YearValue as on JanuaryDepreciationValue as on December
20191000016008400
2020840016006800
2021680016005200
2022520016003600
2023360016002000

#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.
YearValue as on JanuaryDepreciationValue as on December
20191000015008500
2020850012757225
2021722510846141
202261419215220
202352207834437

#3 – Sum of Digit Method

Sum of Digits is calculated in the following manner –

1+2+3+4+5 = 15  

YearValue as on JanuaryRemaining Useful LifeDepreciation FractionDepreciation ExpenseValue as on December
11000050.33326677333
2733340.26721335200
3520030.20016003600
4360020.13310672533
5253310.0675332000

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:

ParticularValues
Purchase PriceXX
Cost Incurred to make the Asset Ready for useXX
Capitalization RateXX

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. read more would include legal fees, commissions, borrowing costs up to the date when the asset is ready for use, etc., are some of the examples.

Conclusion

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 –

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