Following free online accounting training class on Plant Assets will help you to understand:
- Definition of Plant Asset
- Plant Asset Concept in Accounting
- Types of Plant Asset
- Plant Asset Valuation Method
Plant assets’ can be defined as resources that are identified with three characteristics: the assets must have a physical substance with a definite size and shape, the assets will be used in the operational activities of a business, and the assets are not intended for sale to customers. The plant assets are also called as property, plant, and equipment; and fixed assets. These assets are generally expected to provide services or products to the company for particular period of time or for a number of years. The life of plant assets will decline during probable service over their useful lives, but it is not true for land. ‘ The companies generally keep plant assets in good service condition as plant assets play a vital role in continuing operational activities of business. Companies also replace worn-out or outdated plant assets, and expand productive resources when needed. Many companies have extensive investments in plant assets. The cost principle states that companies record plant assets at their cost value. Cost value means the expense which is incurred or mandatory to acquire the asset and prepare the asset ready for its intended use. For acquiring the factory machinery, the cost of purchase price, freight costs paid by the purchaser, and installation costs may occur. The company uses that amount of cost as the basis of accounting for the plant asset over its useful life after the establishment of cost.
How the cost principle is applied in each of the major classes of plant are described below:
Land: Companies purchase land in order to use as a location to build an industrialized plant or organization. In order to make land ready for its intended use the cost of land generally consists of the cash purchase price of land, closing costs of land such as attorney™s fees, the commission fees of real estate brokers, and so on. Any basically record the Land account as a debit entry. If any business acquires vacant land, then the expenses that are generally incurred will be expenditures for clearing, draining, filling, and grading. If there will be an infrastructure on land which must be removed before starting a new building and then the company will debits to the Land account all devastation and removal costs, less any proceeds from salvaged materials.
Land Improvements: Land improvements are the structural additions that are made to land. For examples driveways, parking lots, fences, landscaping etc. Like land, there are also some costs of land improvements to make the improvements ready for their projected use. For example, the ABC company will make a new parking assortment then the cost will include the amount paid for paving, fencing, and lighting and the company will debits to Land Improvements the total of all of these costs. As the service life of Land improvements are limited so their maintenance and replacement procedures are the responsibility of the company. The limited useful life of land improvements leads the companies to depreciate the cost of land improvements over their useful lives.
Buildings: Buildings are considered as facilities which are used in operational activities of business, such as stores, offices, factories, warehouses, and so on. Companies usually debits to the Buildings account with all expenditures that are related to the purchase or manufacture of a building. If a building is purchased or acquired by the business then the cost of purchase price, closing costs and real estate broker™s commission are occurred and to prepare the building ready for its proposed use such expenditures are involved, like, remodeling and replacing or repairing the roof, floors, electrical wiring, and plumbing. And when a new building is constructed then cost may be different, for example the contract price with architects™ fees, building permits, and excavation costs. Some companies charge interest costs to the Buildings account. Some cases the interest costs are required as essential as materials and labor. The involvement of interest costs in the cost of a constructed building is limited to the construction period. For example if construction has been completed, then the company will record consequent interest payments on funds borrowed to finance the construction as debits to Interest Expense.
Equipment: Equipment means the assets which are used in business operations, such as office equipments, factory machinery, delivery trucks, and airplanes. The cost of equipment, generally consists of the cash purchase price, sales taxes, freight charges, and insurance during transit paid by the buyer. It also includes expenditures required in assembling, installing, and testing the unit. But any company does not include or consider the cost of motor vehicle licenses or accident insurance on company vehicles in the cost of equipment. These costs do not bring advantage or affect in future periods. Therefore, these costs are treated as expenses as they are incurred.
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