Property, Plant, and Equipment (PP&E) refers to long-term, tangible assets used in the operations of a business. These assets are listed on a company’s balance sheet and are crucial for generating revenue and supporting future capital investments. PP&E is a key component of financial planning and is particularly important when forecasting capital expenditures (CapEx).

Net PP&E and Depreciation

PP&E is typically reported net of accumulated depreciation, meaning that unless new assets are acquired, the Net PP&E balance declines over time due to depreciation. A depreciation schedule helps track this reduction.

PP&E assets are illiquid, meaning they cannot be quickly converted to cash. The scale of PP&E varies significantly across industries. For example, a construction company usually has a much larger PP&E balance than a professional services firm.

What Qualifies as PP&E?

PP&E includes long-term physical assets that:

Are tangible and identifiable
Are expected to provide economic benefits for more than one year or operating cycle

Common PP&E examples:

Land (does not depreciate)
Buildings
Machinery and equipment
Vehicles
Office furniture and fixtures

Note: Assets intended for sale, such as manufactured products or real estate inventory, are not considered PP&E.

PP&E Formula

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

Example:

In May 2017, Factory Corp. had: - Gross PP&E: $5,000,000
- Accumulated Depreciation: $2,100,000
- New Equipment Purchased: $1,000,000
- Depreciation Expense: $150,000

Net PP&E = 5,000,000 + 1,000,000 – 2,100,000 – 150,000 = 3,750,000

Capital Expenditures (CapEx)

Capital Expenditures are additions to the PP&E account. These include:

Purchases of new equipment
Upgrades to existing assets

CapEx represents long-term investments in the company’s productive capacity.

Recognition and Measurement

PP&E should be recognized on the balance sheet only if:

Future economic benefits are expected to flow to the company
The asset’s cost can be reliably measured

Initial cost may include:

Purchase price, import duties, non-refundable taxes
Direct costs to install or bring the asset to use
Site restoration costs (also called Asset Retirement Obligations or ARO)

Repairs vs. Replacements

Repairs and maintenance → Expensed as incurred
Replacements → Capitalized if they extend the asset's life or functionality

Accounting Treatment:

Repair:
Debit: Maintenance Expense
Credit: Cash
Replacement:
Write off old asset
Capitalize new asset

Depreciation

Depreciation gradually reduces the book value of PP&E, reflecting usage, wear and tear, or obsolescence.

Appears as an expense on the income statement
Reduces the Net PP&E on the balance sheet

Depreciation is an essential part of PP&E accounting and is used to allocate an asset’s cost over its useful life.

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What Is PP&E?