A:

Property, plant and equipment (PP&E) is a term that describes an account on the balance sheet. The PP&E account is a summation of all a company's purchases of property, manufacturing plants and pieces of equipment to that point in time, less any amortization. Amortization is used to devalue an asset as the asset is used, and is designed to measure the asset's economic value throughout its useful life. The balance in this account is remeasured every reporting period due to the amortization deduction, but the balance displayed depends on a few separate determining factors.

To enter a balance into the PP&E account, a firm must find the historic cost of all the assets first. Historic, or purchase, costs are the initial prices the firm paid for securing the use of the asset. If, for example, a company purchased a factory for $10 million, then the historic cost of this factory is $10 million. Historic costs are equal to the nominal purchase price. Once the historic costs are determined, the amortization can be deducted over time, and the balance, called the book value, is entered into the account.

Two of the three different asset classes, property and equipment, are the only assets that are amortized within this account - land is not. The rationale for this is that the economic value of land does not decrease over time, but will most likely increase. The historic costs of the land, or any other asset, may also be adjusted from time to time to better reflect the current market value. For example, if the firm purchased $50,000 worth of land in 1960, the true value of that land would not be obvious on the balance sheet (it may be worth $1 million now). Therefore, from time to time as the company sees fit, assets may be re-evaluated in order to determine a more appropriate cost to use on the balance sheet, but all readjustments must be disclosed within the footnotes sections of the company's financial statements.

For related reading, see the Fundamental Analysis Tutorial and What's the difference between book and market value?

RELATED FAQS
  1. Should computer software be classified as an intangible asset or part of property, ...

    In accounting terms, an intangible asset is something of value that is not of physical nature. On the other hand, property, ... Read Answer >>
  2. What are typical forms of capital assets within a manufacturing company?

    Learn the typical forms of capital assets for a manufacturing company, such as land, buildings, equipment, goodwill and trademarks. Read Answer >>
  3. What are the differences between amortization and impairment?

    Learn the differences between amortization and impairment as they relate to intangible assets held on a company's balance ... Read Answer >>
  4. What are the different types of tangible assets?

    Learn what tangible assets are, what other names they are called, what specific items are included and how they are handled ... Read Answer >>
  5. Does the balance sheet always balance?

    Yes, a balance sheet should always balance. The name "balance sheet" is based on the fact that assets will equal liabilities ... Read Answer >>
  6. What is the difference between carrying value and market value?

    Understand the difference between carrying value and market value. Learn when a company uses carrying value to value an asset ... Read Answer >>
Related Articles
  1. Investing

    Explaining Property, Plant and Equipment

    Property, plant and equipment are company assets that are vital to business operations, but not easily liquidated.
  2. Investing

    Understanding Historical Cost

    Historical cost equals the original purchase price of an asset recorded on a company’s balance sheet.
  3. Investing

    Explaining Amortization In The Balance Sheet

    Amortization occurs when an asset’s value decreases over time, usually over its estimated useful life.
  4. Investing

    Explaining Amortization In The Balance Sheet

    Amortization is important to account for intangible assets. Read to find out more about amortization.
  5. Investing

    Reading the Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
  6. Managing Wealth

    What's an Asset?

    An asset is a resource with economic value.
  7. Investing

    Breaking Down The Balance Sheet

    Knowing what the company's financial statements mean will help you to analyze your investments.
  8. Investing

    Company Clone Cost Reveals True Value

    Find out how calculating a reproduction cost for a company can beat out the dividend discount model.
RELATED TERMS
  1. Property, Plant And Equipment - PP&E

    A company asset that is vital to business operations but cannot ...
  2. Long-Term Assets

    1. The value of a company's property, equipment and other capital ...
  3. Amortization

    1. The paying off of debt in regular installments over a period ...
  4. Historical Cost

    A measure of value used in accounting in which the price of an ...
  5. Carrying Value

    An accounting measure of value, where the value of an asset or ...
  6. Amortized Bond

    A financial certificate that has been reduced in value for records ...
Hot Definitions
  1. Ponzi Scheme

    A fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns ...
  2. Dow Jones Industrial Average - DJIA

    The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange ...
  3. Revolving Credit

    A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is ...
  4. Marginal Utility

    The additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important ...
  5. Contango

    A situation where the futures price of a commodity is above the expected future spot price. Contango refers to a situation ...
  6. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
Trading Center