Video Transcript: Nature of Plant Assets

Hello and welcome back now we're going to discuss the nature of plant assets.  To be classified as a plant asset, an asset must be tangible. That is, that is is  capable of being seen and touched. Have a useful life of more than one year  and be used in business operation, rather than held for resale. Common plant  assets are building machine tools and office equipment on the balance sheet,  these assets appear under the heading, property, plant and equipment. Plant  assets include all long lived tangible assets used to generate principal revenues  of the business. Inventory is a tangible asset, but not a plant asset, because  inventory is usually not long lived, and it is held for sale rather than for use.  What represents a plant asset to one company may be inventory to another. For example, a business such as a retail appliance store may classify a delivery  truck as a plant asset because the truck is used to deliver merchandise. A  business such as a truck dealership would classify the same delivery truck as  inventory, because the truck is held for sale, also, land held for speculation or  not yet put into service is a long term investment rather than a plant asset,  because the land is not being used by the Business. However, standby  equipment used only in peak or emergency periods is a plant asset because it is used in the operations of the business. Accountants view plant assets as a  collection of service potentials that are consumed over a long time. For  example, over several years. A delivery truck may provide 100,000 miles of  delivery service to an appliance business. A new building may provide 40 years  of shelter, while the machine may perform a particular operation of 400,000  parts. In each instance, purchase of a plant asset actually represents the  advanced payment or prepayment for expected services, as with short term  prepayments, the accountant must allocate the cost of these services to the  accounting periods benefited. Accounting for plant assets involve the following  four steps, record the acquisition cost of the asset. Record the allocation of the  asset's original cost to periods of its useful life through depreciation. Record the  subsequent expenditures on the asset and account for the disposal of the asset. Note how the asset's life begins with a procurement and that the recording of its  acquisition cost, which is usually in the form of $1 purchase, then, as the asset  provides services through time, accountants record the asset's depreciation and  any subsequent expenditures related to that asset. Remember that in recording  the life history of an asset, accountants match expenses related to the asset  with the revenues generated by it, because measuring the periodic expense of  plant assets effects net income accounting for property, plant and equipment is  important to financial statement users.