Section 1 Plant Assets

plant assets

Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods. A plant asset is any sort of property, usually equipment, or indeed any type economic asset that a firm owns and utilises in its normal or day-to-day business activities. Plant assets are often long-term assets, or holdings that last over than a year. Current assets indicate a company’s ability to pay its short-term obligations.

What’s the difference between current assets and plant assets?

Current assets such as cash, cash equivalents, accounts receivable, and inventory are considered short-term assets, meaning they are able to be converted to cash in less than a year.

Thus, a quick ratio of 1.5 implies that for every $1 of Company B’s current liabilities, it has $1.50 worth of quick assets which can cover its short-term obligations if needed. Similar to the example shown above, if the cash ratio is 1 or more, the company can easily meet its current liabilities at any time. Current assets play a big role in determining some of these ratios, such as the current ratio, cash ratio, and quick ratio.

What Is a Plant Asset?

Depreciation is a process of cost allocation, not a process of asset valuation. Such cost allocation is designed to properly match expenses with revenues.

The higher the return on assets, the more profitable the company. The loss is equal to the asset’s book value at the time of retirement. If the proceeds exceed the book value a gain plant assets on disposal occurs. Significant changes in estimates must be disclosed in the financial statements. This method is often referred to as the double-declining-balance method.

Examples of Plant Asset Depreciation

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A company should have a clear capitalization policy to ensure that assets are treated consistently. For instance, a company could instruct accountants to capitalize any asset purchases over $5,000.

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Plan assets to increase production and business activities. Through the unity of activity, plant assets such as machinery can be measured in the level of output produced in production. People are important in human resource and especially management. But the output levels of people can not be compared to machines.

In a lease, a party that owns an asset agrees to allow another party to use the asset for an agreed period of time at an agreed price. The cost of the motor vehicle license is treated as an expense, and the cost of an insurance policy is considered a prepaid asset. On the other hand, investors and analysts may also view companies with extremely high current ratios negatively because this could also mean their assets are not being used efficiently. The assets included in this metric are known as “quick” assets because they can be converted quickly into cash. The quick ratio evaluates a company’s capacity to pay its short-term debt obligations through its most liquid or easily convertible assets. The cash ratio indicates the capacity of a company to repay its short-term obligations with its cash or near-cash resources. These may also include assets that are not intended for sale, such as office supplies.

What to Do With Intangible Assets When Adjusting Entries

The value of PP&E is adjusted routinely as fixed assets generally see a decline in value due to use and depreciation. Depreciation is the process of allocating the cost of a tangible asset over its useful life and is used to account for declines in value. The total amount of a company’s cost allocated to depreciation expense over time is called accumulated depreciation. When this method is used to allocate depreciation, the depreciable cost of the asset is spread evenly over the useful life of an asset.

  • Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods.
  • Abrasion & High Traffic Explore asset tags for use in abrasive conditions such as harsh industrial, desert or high-traffic applicaitons.
  • Don’t include land costs with other fixed asset costs, such as buildings.
  • The accounting for exchanges of non-monetary assets has recently converged between IFRS and GAAP.
  • Another example is land held for future expansion, which is reported as a long-term investment.

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