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. For what kinds of businesses is the fixed asset turnover ratio most important?

    Learn about the fixed asset turnover ratio and why businesses in asset-heavy industries, such as manufacturing, pay special ...
  2. What is the fixed asset turnover ratio and why is it important?

    Learn about the fixed asset turnover ratio and how this calculation is used to analyze how efficiently a company uses its ...
  3. What are some examples of general and administrative expenses?

    Learn examples of the general and administrative expenses such as audit fees, legal fees, rent, utilities and office equipment ...
  4. What is the difference between called-up share capital and paid-up share capital?

    Find out about the difference between called-up and paid-up share capital, including an explanation of the four categories ...
RELATED TERMS
  1. Chart Of Accounts

    A listing of each account a company owns, along with the account ...
  2. Convention Statement

    A document filed by an insurance or reinsurance company that ...
  3. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative ...
  4. Nonadmitted Balance

    An item on an insurer’s balance sheet that represents reinsured ...
  5. Earned Premium

    The amount of total premiums collected by an insurance company ...
  6. Best's Capital Adequacy Relativity (BCAR)

    A rating of an insurance company’s balance sheet strength. Best’s ...

You May Also Like

Related Articles
  1. Fundamental Analysis

    For what kinds of businesses is the ...

  2. Fundamental Analysis

    What is the fixed asset turnover ratio ...

  3. Stock Analysis

    How To Analyze Netflix's Income Statements

  4. Fundamental Analysis

    The Most Crucial Financial Ratios For ...

  5. Investing

    Apple or Google: Which is the Better ...

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!