Property, plant and equipment are a group of assets your company holds that are initially recognized on your balance sheet. Initially they’re measured at cost which we have defined before and that’s that. Or so you might think.
The thing with property, plant and equipment or PPE is that they’re used for a longer period within the process of generating your company benefits. As such, as you might imagine, just keeping them at their original cost within your accounts isn’t exactly what you’d expect from accruals basis of accounting where against revenue there’s an expense and so on. More so, assets tend to live a life of their own in breaking down etc.
So therefore we need to know how to measure (we call it ‘measuring’ in accounting) your PPE items after they’ve initially been recognized. As a part of this measuring process there are processes that are happening regularly and things that are more like one-off things. For an example, as we mentioned, with accruals basis of accounting against revenue there ought to be an expense and obviously your assets should be part of it. PPE items therefore are depreciated into expenses over the period they’re used. As they’re used, they are part of creating either revenues or decreasing expenses or some such, so you’re getting benefits from using them and as such you should reflect this usage in the form of showing an expense from them. This is called depreciation. One-off transactions are for occasions when an item becomes obsolete, breaks down and needs repairs or a replacement or simply loses value as in it’s not generating what was expected of it.
For each of these occasions there are accounting treatments we’ll discuss further later on.