Why learn how to account for property, plant, and equipment?

Most companies present their balance sheet according to three generally recognized classifications:

1. current assets,
2. property and equipment
3. other noncurrent assets

Property and equipment are often called property, plant, and equipment (PP&E) because in the broadest sense, property and equipment would include the physical plant, which would be the manufacturing buildings and equipment.

Noncurrent assets consist of tangible assets and intangible assets, which have distinguishing characteristics as follows:

• Tangible assets have physical characteristics we can see and touch. In addition to plant assets such as buildings and furniture, they include natural resources such as gas, oil, and investments.
• Intangible assets have no physical characteristics we can see and touch, but represent exclusive privileges and rights to their owners. Common intangible assets include patents and goodwill.

Notice that Facebook, Inc. doesn’t subtotal property and equipment separately from the other noncurrent assets, but Facebook’s balance sheet is in that order, which mirrors the theoretical order of liquidity.

See the balance sheet long description here.

In addition, even though Facebook isn’t thought of as a “bricks and mortar” kind of establishment, like The Home Depot, which is largely reliant on physical stores, Facebook still has a significant investment in property and equipment ($35 billion).

Property, plant, and equipment (PP&E) are long-lived (noncurrent) assets because they are expected to contribute to revenue for more than one year. To be classified as a plant asset, an asset must:

1. be tangible, that is, capable of being seen and touched
2. have a useful service life of more than one year
3. be used in business operations rather than held for resale.

Common plant assets are buildings, machines, tools, and office equipment. Here is more detail on the $35 billion in property and equipment that Facebook reported on its 2019 financial statements.

See the note long description here.

In this section, we will look at the accounting treatment for plant assets. Natural resources, intangible assets, and investments will be covered in the next modules.

By the end of this section, you will be able to: (a) differentiate between current expenses and capital expenditures; (b) describe and compute depreciation expense and know how it relates to accumulated depreciation; (c) record purchases and sales of fixed assets; and (d) understand the disclosures in the financial statements related to property, plant, and equipment (PP&E).