Property, Plant & Equipment (PPE)
Tangible long-term assets—the backbone of business operations.
Why This Matters
A delivery company buys a truck for $50,000. A manufacturer installs a $2 million machine. A retailer purchases a building for $500,000.
These aren't expenses. They're investments in the future.
Unlike inventory (which you sell) or supplies (which you use up quickly), these assets stick around for years—sometimes decades. They help generate revenue long after the check clears.
Here's the accounting challenge:
If you expense that $50,000 truck immediately, your income statement tanks this year and looks artificially profitable every year after. That's misleading. The truck helps you earn revenue for 5-10 years, so the cost should be spread across those years.
Get PPE wrong, and you distort:
- Profitability (expenses in wrong periods)
- Asset values (balance sheet lies)
- Tax obligations
Understanding PPE is understanding how businesses invest in their future—and how that investment shows up in financial statements.
What Is PPE?
TANGIBLE
Physical substance
LONG-TERM
Useful life > 1 year
OPERATIONS
Used to produce
NOT FOR SALE
Held for use, not inventory
PROPERTY
- Land
- Land improvements
- Parking lots
- Fencing
PLANT
- Buildings
- Factories
- Warehouses
- Retail stores
EQUIPMENT
- Machinery
- Vehicles
- Computers
- Furniture / Tools
The Cost of PPE: What Gets Capitalized?
When you buy PPE, the cost isn't just the purchase price. It includes everything necessary to get the asset ready for its intended use.
- Purchase price (minus discounts)
- Sales tax
- Freight and delivery charges
- Installation costs
- Testing and trial runs
- Site preparation (clearing)
- Professional fees (legal, architect)
- Repairs after asset is in use
- Maintenance costs
- Insurance after purchase
- Property taxes after purchase
- Fines for violations
- Costs due to errors or inefficiency
Real Example: Cost of Equipment
Your company purchases a manufacturing machine.
| List price | $100,000 |
| Negotiated discount | ($5,000) |
| Sales tax (6%) | $5,700 |
| Freight shipping | $2,000 |
| Insurance during transit | $500 |
| Installation | $3,500 |
| Testing and calibration | $1,200 |
| Foundation/site prep | $2,100 |
| Total Capitalized Cost | $110,000 |
Journal Entry
Equipment110,000
Cash (or A/P)110,000
Why capitalize all this? Because the machine isn't "ready for use" until it's delivered, installed, tested, and operational. All those costs are part of getting the asset ready.
Specific Asset Considerations
Land has an unlimited useful life. It doesn't wear out.
Cost Includes:
- • Purchase price & closing costs
- • Back taxes paid by buyer
- • Demolition of old structures
- • Clearing, grading, draining
Land Improvements (Separate):
These ARE depreciated over their useful life.
- • Parking lots & driveways
- • Fencing & lighting
- • Landscaping & sidewalks
Purchased Building
Capitalize: Purchase price + closing costs + renovation to prepare for use.
Self-Constructed Building
Capitalize: Materials, Labor, Overhead, Arch fees, Permits.
Lump-Sum Purchases (Basket Purchase)
Sometimes you buy multiple assets for one price. You must allocate the cost based on relative fair market values.
Scenario: You purchase land and a building together for $800,000. Appraisals show Land fair value: $300,000, Building fair value: $700,000.
1. Find Relative Value
Total Fair Value = $1,000,000
Land: $300k / $1M = 30%
Bldg: $700k / $1M = 70%
2. Allocate Cost
Land: 30% × $800k = $240,000
Bldg: 70% × $800k = $560,000
Journal Entry
Land240,000
Building560,000
Cash800,000
// To record lump-sum purchase
Capital vs. Revenue Expenditures
CAPITAL EXPENDITURES
Purpose:
Extend useful life, increase capacity, or improve quality.
- • Major overhaul extending life
- • Addition to building (new wing)
- • Upgrade increasing capacity
DR: Equipment (Asset) XX,XXX
REVENUE EXPENDITURES
Purpose:
Maintain current condition, keep it running normally.
- • Routine repairs
- • Oil changes, tune-ups
- • Cleaning and painting
DR: Repairs & Maint. Expense XX,XXX
Does it just keep it running normally? Expense.
PPE on the Balance Sheet
Balance Sheet (Partial)
ASSETS
Property, Plant & Equipment:
Land (no depreciation)$200,000
Buildings$500,000
Less: Accumulated Depreciation(100,000)
400,000
Equipment$300,000
Less: Accumulated Depreciation(120,000)
180,000
Total PP&E (Net Book Value)$780,000
The PPE Lifecycle
1. ACQUIRE
Capitalize
Record at full cost
CR: Cash
2. USE
Depreciate
Allocate cost over life
CR: Accum Depr
3. DISPOSE
Remove
Sell, discard, trade
Accum Depr
Key Takeaway
Property, Plant & Equipment (PPE) represents tangible, long-term assets used in operations. The cost of PPE includes everything needed to get the asset ready for use.
Land is never depreciated; all other PPE is depreciated over its useful life. After acquisition, capital expenditures (improvements) are added to the asset; revenue expenditures (repairs) are expensed immediately. Understanding PPE means understanding how businesses invest in their operational infrastructure.
Test Your Understanding
See if you've got the basics down. Click each option and check your answer.
Question 1: Which of the following costs should be capitalized when purchasing equipment?
Question 2: Land is purchased for $150,000. The buyer pays $8,000 in closing costs, $12,000 to demolish an old structure, and $5,000 to grade the land. What is the capitalized cost of the land?
Question 3: A company buys land and a building together for $600,000. Land's fair value is $200,000; Building's fair value is $400,000. How much is recorded for the building?
Question 4: A company spends $15,000 to add a new wing to its building. This is an example of:
Question 5: Which asset is NOT depreciated?
Ready to Practice?
You now understand what PPE is and how to record it. The Practice Lab lets you calculate capitalized costs, allocate lump-sum purchases, and distinguish capital vs revenue expenditures.
Try the Practice LabWhat's Next?
Now that you know how to record PPE, the next question is: How do you expense it over time? That's depreciation.