FAQs: Plant, Property, and Equipment (PP and E) Assets

By Indeed Editorial Team

Published March 29, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

If you work in finance, you may be responsible for calculating the value of a company's assets in terms of property, plant, and equipment (PP&E). This number represents the company's physical assets. It plays a key role in planning expenditures, expanding business operations, and generating revenue. Understanding what qualifies as a physical asset can help you create a detailed and accurate balance sheet. In this article, we discuss property, plant, and equipment (PP and E) assets, explain how to calculate their values, answer some frequently asked questions, and give you an example of the completed formula.

What are property, plant, and equipment (PP and E) assets?

Companies classify any physical asset that helps them generate revenue as property, plant, and equipment (PP and E). These are assets a company may not own outright but instead pay rent, a mortgage, or other fees to use. Assets usually vary between companies and across different industries but are generally challenging to convert into cash.

PP&E assets are long-term, fixed, tangible, and identifiable elements that a company expects to help generate revenue. These assets may also help to yield an economic return for a single year or one financial cycle. If a company manufactures and/or sells these items, they don't count as PP&E assets. Instead, companies classify them as inventory since they're intended for consumers. Some examples of PP&E assets include:

  • Heavy machinery

  • Production equipment

  • Vehicles

  • Buildings

  • Land

  • Office equipment

  • Building furnishings

Related: What Does a Property Manager Do?

How to calculate PP&E

Here are the steps you can follow to calculate PP&E:

1. Determine gross PP&E

The gross PP&E is the total value of a company's fixed resources at any point in time. This number changes as a company buys and sells assets, but gross PP&E only includes assets held during the previous fiscal cycle. It doesn't include those that were more recently purchased.

Related: How to Calculate Net Profit Margin (With Examples)

2. Add capital expenditures

Capital expenditures occur when a company invests money to update existing assets or purchase new equipment. Capital expenditure costs can include the purchase price, customs duties, taxes, sales discounts, rebates, transportation, and future removal costs. For example, if Evergreen Manufacturing purchased a new forklift for $10,000 and paid $3,000 to transport it to the company's facility, the capital expenditure would be $13,000. You can evaluate and then add in the capital expenditure for every asset you include in the calculation.

Related: All You Need to Know about How to Calculate Fixed Cost

3. Subtract accumulated depreciation

Aside from land, PP&E assets can depreciate in value. Depreciation is the reduction of an asset's worth due to use, the passage of time, or obsolescence. An asset continues to depreciate until it reaches its salvageable or scrap value. Companies use accumulated depreciation to calculate PP&E. This depreciation represents the total amount of value lost over a specific time frame, such as an earnings quarter. There are several ways to calculate accumulated depreciation. They include the straight-line method, the unit of production method, or the double-declining balance method.

The straight-line method is the one most commonly used to calculate accumulated depreciation. To use it, first determine the asset's original value, its expected salvage value, and projected years of service. Then you can input those numbers into this formula: (asset cost ‒ expected salvage value) / expected years of use. For example, if the asset originally cost the company $50,000 and may be worth only $10,000 at the end of its 12-year expected service life. This means that the asset's accumulated depreciation is $3,333 each year over 12 years. Here's what your formula may look like:

($50,000 – $10,000) / 12 = $3,333

4. Calculate the PP&E

Once you know the company's gross PP&E, capital expenditures, and accumulated depreciation, you can input the numbers into the formula to calculate the PP&E. For example, if the gross PP&E of all the company's assets is $150,000, the capital expenditure is $30,000, and the accumulated depreciation is $10,000, here's what the calculation may look like:

Net PP&E = gross PP&E + capital expenditures - accumulated depreciation

150,000 + 30,000 - 10,000 = 170,000

This means the company's net PP&E is $170,000.

Frequently asked questions about PP&E

To help you better understand PP&E, here are some answers to frequently asked questions you may have:

What are the economic characteristics of PP&E?

PP&E assets differ from other company resources insofar as they possess a useful life term. You can define an asset's useful life as the number of years a company expects to use it to generate revenue. PP&E resources retain financial value (known as salvage value) at the end of their useful life term. Fixed assets also experience depreciation, meaning their value decreases over time.

Is there an asset that doesn't depreciate in value?

All assets other than land depreciate in value. This would mean that when calculating the PP&E for company-owned land, you don't subtract depreciation. Instead, you assess the current market land value and include that in your calculation.

Related: How to Calculate Inflation Rate (With Examples)

What is PP&E used for?

Companies calculate their PP&E to create financial statements that accurately reflect the company's worth. Future investors can then use this information to ascertain the extent of their financial commitments. If a company has a lot of PP&E assets, this may reflect its potential for long-term growth, which can make it a safe investment.

What is a balance sheet?

Along with income and cash flow statements, a balance sheet is one of the three most commonly used financial statements. Also known as a statement of financial position, a balance sheet summarizes a company's overall worth. It covers three categories: assets, liabilities, and shareholders' equity. Companies typically create monthly, quarterly, or annual balance sheets to reflect their book value.

Related: What Is a Balance Sheet? FAQs, Components, and an Example

What does PP&E mean in accounting?

Companies account for PP&E in their monthly, quarterly, and annual financial statements. The PP&E data appears in their balance sheet as either PP&E or property, plant, and equipment. A company adds assets to its PP&E account as it gets land, equipment, or buildings that help to generate revenue.

What are capital expenditures?

Capital expenditures, also known as CapEx, are funds used to buy, upgrade, and maintain a company's physical assets. Companies make these investments based on the potential revenue gain from the new asset. Capital expenditures can include new production equipment, updated computer software systems, or a new manufacturing facility.

How does a company annotate PP&E on its balance sheet?

You can typically find a company's PP&E listed in the current assets section of its balance sheet. It's important to record this information accurately and clearly on the balance sheet, as auditors or potential investors often check this information. It may also be in a subheading under total assets.

How does a company determine when to replace or repair an asset?

Some companies replace an asset before it reaches its scrap value. This can maximize the asset's revenue-generating potential. It also allows the company to adopt a more technologically sophisticated asset, one that can produce a higher revenue stream. The company might also choose to purchase a new asset when the cost of replacement is less than the cost of repair.

What's the difference between PP&E and noncurrent assets?

Noncurrent assets are long-term investments that don't provide any immediate monetary return. All PP&E assets are noncurrent, but there are other intangible, non-physical assets, such as copyrights, patents, trademarks, and brand name information, that also fall into that category.

What is a limitation of PP&E?

As a company only includes tangible assets as a part of its PP&E profile, so it may be challenging to determine a company's complete and accurate financial performance from one document. This is especially true for a company that has only a few fixed resources and several intangible assets. Analysts and investors typically look at other financial documents for more insight into a company's value and potential.

PP&E calculation example

Here's an example of what a company's PP&E calculation may look like:

On March 1, 2021, Tennant Industries reported a gross PP&E of $453,000. During that period, it purchased a new company truck for $60,000 and transported it to its warehouse for $3,000. The company also repaired an existing asset for $14,000, making its total capital expenditures $77,000. Lastly, the total depreciation for all of Tennant's assets amounted to $27,500.

It's now April 1, 2021, and the company calculates and reports the net PP&E. It adds the gross PP&E of $453,000 to the $77,000 of capital expenditures. This equals $530,000. Then, Tennant subtracts its accumulated depreciation of $27,500 from that total. Therefore, the company has an updated net PP&E value of $502,500.

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