What are Plant Assets?
A plant asset, also known as a fixed asset, 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 life, 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 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 which 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, then 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 – One of the most common examples of plant assets, or fixed assets. They can be either purchased or taken on lease, 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. This 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.
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 Method – 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 Method – 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 periods. 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 Method, Insurance Policy Method, Unit Production Method, etc. It would depend upon the company accounting policies, 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 value remains in the books.
#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.
#3 – Sum of Digit Method
Sum of Digits is calculated in the following manner –
1+2+3+4+5 = 15
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:
The cost incurred 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.
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