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 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 >>
  3. 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 >>
  4. 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 >>
  5. What does amortization mean in the context of a pension plan?

    Discover when and why accountants use amortization techniques in the context of pension plans, and why those changes help ... Read Answer >>
  6. What's the difference between a trial balance and a balance sheet?

    Discover what is included in a trial balance and a balance sheet, and learn about what sets these two accounting reports ... Read Answer >>
Related Articles
  1. Investing

    Understanding Historical Cost

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

    How to Evaluate a Company's Balance Sheet

    Asset performance shows how what a company owes and owns affects its investment quality.
  3. Investing

    Breaking Down The Balance Sheet

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

    Company Clone Cost Reveals True Value

    Find out how calculating a reproduction cost for a company can beat out the dividend discount model.
  5. Investing

    Depreciation: Straight-Line Vs. Double-Declining Methods

    Appreciate the different methods used to describe how book value is "used up".
  6. Investing

    Understanding Capital Assets

    A capital asset is one that a company plans on owning for more than one year, and uses in the production of revenue.
  7. Investing

    The Difference Between Book and Market Value

    Book value is the price paid for an asset. It never changes as long as the asset is owned. Market value is the current price at which the asset can sell.
  8. Investing

    Uncover The Next Real Estate Hot Spot

    Real estate land speculation is a way to get in on a hot investment before a boom hits.
  9. Investing

    What are Noncurrent Assets?

    Noncurrent assets are property that a company owns that will last for more than one year.
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. Amortized Bond

    A financial certificate that has been reduced in value for records ...
  6. Straight Line Basis

    A method of computing amortization (depreciation) by dividing ...
Hot Definitions
  1. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  2. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  3. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  4. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  5. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
  6. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
Trading Center