Property, plant, and equipment (PPE) refers to the tangible assets owned by a company that it uses for business operations. PPE includes land, buildings, machinery, vehicles, furniture and fixtures. These items are expected to last for more than a year and are not intended for resale.
PPE is reported on the balance sheet of a company as an asset. The cost of acquiring or constructing these assets is recorded as their initial value. Over time, the value of PPE decreases due to wear and tear or obsolescence. This decrease in value is known as depreciation and it reflects the decline in usefulness over time.
Depreciation can be calculated using various methods such as straight-line method or accelerated depreciation method like double declining balance method depending on what suits best for the business operations. Straight-line method involves dividing the initial cost of PPE by its useful life while double declining balance method involves charging higher amount of depreciation in early years compared to later years.
It’s important to note that not all costs associated with PPE can be capitalized; only those related directly to acquisition or construction can be included in the cost basis. For example, any ongoing maintenance costs would not be included but expensed out immediately instead.
One important thing to keep in mind about PPE is that it has a significant impact on a company’s financial performance indicators such as profit margins and return on investment (ROI). As companies acquire new property or invest in new plant equipment they may need financing options like loans which adds up interest expenses thus reducing net income at times.
Another aspect worth noting about PPE is how it affects taxes- since depreciation reduces taxable income by lowering profits before tax which results into lesser taxes paid by businesses
Investors often look at how much money companies spend on capital expenditures (which include purchases of property, plant, and equipment) when evaluating whether or not they should invest in them because this gives them an idea about future growth potential.
In summary, PPE is an important part of a company’s assets and has significant effects on its financial performance. It is essential for companies to keep track of their PPE and make sure they are being maintained properly in order to maximize their usefulness and value.