What does plant and equipment mean in property? Good question!
Property, plant, and equipment, known more commonly as PP&E, are long-term assets essential to any business operation. Property plant and equipment are tangible, fixed assets and cannot readily be liquidated like other assets like cash. The overall value of a company’s PP&E can vary dramatically compared to its total assets.
This guide will inform you with everything you need to know about what plant and equipment means, to the difference between plant and equipment.
Property, Plant, and Equipment: Your Guide
Investment properties are usually made up of buildings or pieces of land that are rented to tenants over an extended period, usually over one year. Because the property is held for the supply of service, in this case, rental to others, it comes under the property plant and equipment banner.
Any item of Property, Plant and Equipment should be measured at cost when accounting. According to the international accounting standard, the initial measurement of this asset must include all costs involved in bringing the investment into a working condition. This first measurement also consists of the capital cost. This can include the cost of the site preparation, delivery cost, borrowing cost, testing, or professional fees.
Property, plant, and equipment are often referred to as plant and equipment or (even shorter), plant assets. These assets are long-lived as they are expected to be operated or used for longer than one year’s accounting period. Tangible assets are one type of long-lived asset and are considered assets we can see and touch; these include buildings, furniture, and natural resources such as gas and oil.
How is Property Plant and Equipment Calculated?
Let’s assume that you buy a building worth $1,000,000, along with $50,000 of furniture. Your Net PP&E at the moment of purchase is $1,050,000.
Each year, however, you must take into account the depreciation value of that PP&E to account for the fact that it will wear out and need to be fixed or repurchased in the future. Now, in the first year, assuming your property depreciates and furniture by $105,000 (or 10% of the original value). Then, at the end of the year, your Net PP&E is:
$1,050,000 – $105,000 = $945,000
As you purchase more properties and thereby increase your PP&E, the value of your Net PP&E will increase, and as time passes, the value will decrease according to depreciation expenses.
The acquisition cost of a plant asset is calculated as the total cost incurred to purchase and bring the asset to operating condition. This cost takes into account all reasonable and necessary expenditures to obtain the asset and get it working. These costs also include repair costs or maintenance costs for used or damaged purchases.
When selling on your asset, you must also calculate the depreciation that occurred between the entry date of its purchase and the date its ownership was transferred. The net value amounts to the total accumulated depreciation subtracted from the original cost. This is used to determine if there was a total gain or loss on the transaction for the seller.
Recording Land Costs When Purchasing Property
The cost of land includes both its purchase price and other many other costs, including:
- Real Estate agent commissions.
- Title search and title transfer fees.
- Existing mortgage notes or unpaid back taxes assumed by the purchaser.
- Costs of surveying, clearing, and grading.
- Local assessments for sidewalks, streets, sewers, and water mains.
- Sometimes land purchased as a building site contains unusable structures that need to be removed.
Your Property Returns specialist will debit the entire cost to land, including the cost of removing the building, minus any cash earned from the sale of salvaged items while the land is being readied for use; the land is beneficial as it is considered to have an unlimited life and is therefore not depreciable.
Difference Between Plant and Equipment
Many people refer to plant and equipment, sometimes known as machinery, in the same respect. The two are different terms: simply put, plant refers to immovable property or property that has been physically attached to the foundations. In contrast, the equipment can be taken out of the property on short notice. Some plant and equipment examples for residential and investment properties include white goods, hot water systems, furnishings, drapes, and blinds. These items are considered not affixed to the building and removable. Whilst there may not be a massive difference between plant and equipment within your property portfolio, it’s vital to understand their differences. Property Plant and Equipment are long-term assets critical to the success of any investment property portfolio.
Why is Property Plant and Equipment Important?
It’s essential for individuals to accurately record their portfolios property, plant and equipment on its balance sheet. Reviewing your property, plant, and equipment can give you insights into where and how an individual could spend its money on fixed assets in ways that could help the company increase its profitability.
It’s also important to track your PP&E in case you need to sell assets to raise money. While most fixed assets depreciate over time, they are named ‘fixed’ because they are not easily converted to cash; some assets such as real estate can increase in value over time, providing a company with a possible option for raising money.
Another major component of answering the question “What does plant, and equipment mean?”, is its relation to depreciation. Depreciation reduces the total value of property, plant, and equipment. This is because the value of assets lowers over time due to general wear and tear and the reduction of their worthwhile lives. The depreciation expense is used to reduce the value of the total balance.
Property Returns – Specialists in Property Plant and Equipment
Property Returns can help you effectively manage your property plant and equipment assets and maximise your returns should you ever need to renovate your property or sell it. Our property experts will guide you through understanding the nature of your assets and any discrepancies on your balance sheet. If you purchase a property today or twenty years ago, we can provide accurate and helpful information in relation to residential property, commercial buildings, and business purchases. If you are looking for more information on your property or your more comprehensive portfolio, get in touch with us today on our website or call us on 1300 829 221.