Is Equipment Considered a Plant Asset in Accounting?
Uncover key distinctions for equipment as plant assets in accounting. Accurate classification shapes financial reporting and business insights.
In accounting, assets are economic resources controlled by a business that provide future economic benefits. Proper asset classification is fundamental for accurate financial reporting and decision-making. It dictates how an asset appears on financial statements and how its cost is accounted for over time.
Understanding Plant Assets
Plant assets, also known as fixed assets or property, plant, and equipment (PP&E), are tangible assets a business uses in its operations to generate revenue. They have a physical form and are expected to provide benefits for more than one accounting period. They are not purchased for resale in the ordinary course of business.
Examples include land, buildings, and large machinery. Unlike current assets, which are consumed or converted into cash within one year, plant assets represent a long-term investment. Their purpose is to support ongoing business operations.
Understanding Equipment in Accounting
Equipment is a broad category encompassing various tangible assets utilized in a business’s daily operations. This includes items such as factory machinery, delivery vehicles, computers, specialized tools, and office furniture. These assets are acquired to facilitate production, service delivery, or administrative functions.
The classification of equipment depends on its intended purpose and expected duration of use. If an item is acquired for long-term use in revenue-generating activities, it falls under a specific asset type.
Connecting Equipment to Plant Assets
Yes, equipment is considered a plant asset if it meets specific criteria. For classification as a plant asset, equipment must be tangible, used in business operations to generate revenue, and expected to provide benefits for more than one accounting period. This includes manufacturing machinery, company vehicles, and computer systems used for business purposes.
For example, a printing press used by a publishing company or a delivery truck owned by a logistics firm are plant assets because they are tangible, used in ongoing operations, and have a useful life extending beyond a single year. Exceptions include equipment held for sale by a dealer, which is inventory, or very small, low-value items (e.g., a stapler) that are expensed immediately due to their immaterial cost.
Why Asset Classification Matters
Correctly classifying equipment as a plant asset impacts a company’s financial reporting and tax obligations. Plant assets are subject to depreciation, which allocates their cost over their useful life. This depreciation expense is recorded on the income statement, reducing reported profit. For tax purposes, the Modified Accelerated Cost Recovery System (MACRS) is the standard method in the U.S., allowing businesses to deduct a portion of an asset’s cost each year. MACRS often permits larger deductions in earlier years.
The IRS classifies assets into different recovery periods under MACRS; office furniture has a 7-year useful life, while automobiles and computers have a 5-year useful life. Businesses determine the asset’s original value, including purchase price, sales tax, shipping, and installation costs, to establish its basis for depreciation. Plant assets are presented on the balance sheet at their book value, which is their original cost less accumulated depreciation. This presentation influences how investors and lenders perceive a company’s financial stability and profitability.