Accounting for property, plant, and equipment is one of the technical areas where accountants often face a challenge. In this article, we have discussed different accounting treatments for PPE.
Accounting entry on the purchase of PPE.
The following journal entry is posted when PPE is purchased via liability. For instance, the business purchases PPE amounting to $10,000 on credit. Let’s pass the journal entry.
|PPE (Non-Current Asset)
|Accounts payable (Liability)
The debit impact of the transaction is recorded for the assets as it’s an inflow of asset for the business. Further, it’s classified as a non-current asset because the economic benefit is to be obtained in more than one accounting period. On the other hand, accounts payable is recorded as there is an increasing obligation for the business to settle liability in the future.
Accounting entry to charge depreciation
Once an asset is brought into the useable condition, accounting standards require charge of depreciation on the assets. To depreciate assets we need to assess useful life and follow certain accounting principles.
For instance, let’s assume an asset is a purchase for $10,000 and the useful life of the asset is 20 years and the selected accounting method is a straight line. Following calculations need to be performed.
Depreciation = cost of asset / useful life
Depreciation = $10,000/20
Depreciation = 500 per year
So, the following journal entry can be posted in the accounting system.
The debit impact of the transaction is recorded for the depreciation. It’s a normal expense recorded in the financial statement via income statement. On the other hand, the credit impact of the transaction is the creation of contra account against the original cost balance. This contra account is removed from books of accounts once we remove an original asset via disposal.
Year to year, we keep charging depreciation and adding balance to the accumulated depreciation account. However, it’s a temporary account and removed on disposal. Further, it’s important to note that deduction of the accumulated balance from original cost leads to Net Book Value.
Accounting entry for revaluation
If the value of an asset is appreciated, it needs to be recorded in the books. For instance, the dollar value of the asset raises by $2,000 from carrying value. It can be recorded as follows.
|PPE (an increase of an asset)
The debit impact of the transaction is recording asset appreciation. It’s important to note that appreciation is calculated by comparing the current market value/fair value with the carrying balance. This difference is $2,000 (assumed as recorded). On the other hand, credit impact is recorded for the revaluation surplus in OCI. This revaluation surplus is utilized for excess depreciation and any impairment if applicable in the future.
Accounting entry for disposal of the property plant and equipment
The disposal of PPE leads to the removal of asset costs and the accumulated depreciation. For instance, the cost of an asset amounts to $10,000, accumulated depreciation amounts to $9,600. So, the carrying value of the asset amounts to $400 and sold for $700. It means there is a profit of $300 ($700-$400) in the books of accounts. This transaction can be posted as follows.
|Profit and loss statement
Let’s analyze the given transaction in the above journal entry for sale with respect to serial number.
- It’s a debit entry and recorded as an increase of cash. This is the amount received against the sale of the PPE.
- It’s the removal of original costs from accounting books. It’s because we have sold the asset. Hence, there is a need to remove costs from books.
- This entry removes contra account from the books of accounts.
- This entry records profit in the accounting books. It’s because the cash received is more than carrying value of the assets.
It’s important to note that there can be loss if cash received by selling asset is lower than carrying value. Further, read on tothefinance.