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Plant Assets

Plant assets are long-term assets that will be used to generate income for the company. Because these assets have a physical existence, they are also referred to as tangible assets. Often, you will hear these assets called fixed assets or property, plant, and equipment (PPE).

Plant assets are used over a period of time to produce income. Some examples include

• equipment,
• machinery,
• buildings,
• furniture, and
• vehicles.

Because plant assets are going to be used over time, their cost must be capitalized. The term capitalized refers to the fact that these assets are used for the production of income; the cost of the assets will be recovered as each asset creates income for the company. One of the rules of GAAP is that the asset must remain on the balance sheet for as long as it is owned. The asset also remains on the books at cost, which includes all costs that are incurred in the purchase of the asset. Because the company must capitalize the asset, the company will record an expense as the asset is used over its useful life.

Note that the following are not fixed assets:

• assets purchased as investments and
• assets purchased with the intent to be sold (inventory).

Example of Capital and Revenue Expenditures

1. On January 1, 2017, your company purchased machinery for $50,000 cash. You've estimated that the machinery will last five years (estimated useful life). The machinery is a plant asset and a capital expenditure. The cost of the machinery will be debited to an asset account, and you will depreciate (expense) this asset over its useful life. The balance in the machinery account will remain at $50,000 for its entire useful life.
2. On January 15, you made minor repairs to the machinery at a cost of $250. This is an example of a revenue expenditure. The $250 will be debited to an expense account and will appear on the income statement to offset this year’s revenue.

You would record these transactions as follows: