What Is a Plant Asset in Accounting?

A plant asset, often referred to as a fixed asset, represents a long-term tangible resource owned by a business. These assets are acquired for use in business operations rather than for resale. Their purpose is to generate revenue over multiple accounting periods, supporting the company’s productive capacity.

Defining Characteristics

Plant assets are physical, with a tangible form that can be seen and touched. This allows them to be directly utilized in the production of goods or services.

These assets are long-lived, with a useful life extending beyond a single accounting period, typically more than one year. Businesses acquire them for prolonged use. Plant assets are used in the ordinary course of business operations and are not held for sale to customers.

Common Examples

Land is a prominent example, as it is a physical asset used for operations and has an indefinite useful life, meaning it generally does not wear out. Buildings, such as offices, factories, or warehouses, also fall into this category because they are tangible structures used over many years to support business activities.

Machinery and equipment are frequently classified as plant assets, including manufacturing equipment, vehicles used for delivery, or specialized tools. These items are tangible, provide economic benefits over several years, and are directly involved in producing goods or providing services. Office furniture, computers, and fixtures also represent plant assets.

Recording Asset Cost

Businesses initially record plant assets on their financial statements following the historical cost principle. This principle dictates that assets are recorded at the original cash equivalent price paid to acquire them. The cost includes not only the purchase price but also all expenditures necessary to bring the asset to its intended use and location.

For example, the cost of a machine would include its invoice price, any sales taxes paid, transportation charges to move it to the factory, and installation costs. Professional fees, such as those paid to architects for building design or engineers for machinery setup, are also added to the asset’s capitalized cost. However, costs incurred after the asset is ready for use, like routine maintenance or minor repairs, are generally expensed as they occur rather than being added to the asset’s value.

Accounting for Depreciation

Depreciation is the accounting process of allocating the cost of a tangible plant asset over its useful life. This systematic allocation aims to match the expense of using the asset with the revenues it helps generate each period. It reflects the gradual consumption, wear and tear, or obsolescence of the asset over time.

Most plant assets, except for land, are subject to depreciation because their usefulness diminishes over time. A common method, straight-line depreciation, spreads the asset’s cost evenly across its estimated useful life. This accounting entry reduces the asset’s book value on the balance sheet and simultaneously creates a depreciation expense on the income statement, reflecting the portion of the asset’s cost consumed during the period.