PROPERTY, PLANT AND EQUIPMENT
Week 8:
Property, Plant and Equipment
This week will focus on the accounting treatment of plant assets. It will discuss the difference
between capital and revenue expenditure. It will further discuss various depreciation methods
and its application on plant assets.
This topic covers the following parts:
 Capital versus revenue expenditures
 Depreciation methods
- Straight Line Method
- Diminishing Balance Method
- MACRS Method
Learning resources
Chapter 9 of the textbook is essential: Financial & Managerial Accounting, The basis for
Business Decisions, 17th edition, (2017), Williams, Hakka, Bettner, and Carcello.
Key terms and concepts
- Capital expenditure
- Capitalize
- Revenue expenditure
- Expensing
- Depreciation
Part 1: Capital versus Revenue Expenditures
This part distinguishes between capital and revenue expenditures. Capital expenditures are the
expenditures for the purchase or expansion of a plant asset. These expenditures are recorded in
an asset account and accountants often use the verb “capitalize” to refer to the process of
charging expenditure to an asset account. Contrary to this, expenditures for fuel, maintenance,
ordinary repairs and other items necessary to the use or ownership of plant assets are called
Revenue expenditures. These expenditures are recorded in an expense account and accountants
use the verb “expensing” the item to refer to the process of charging expenditure directly to an
expense account.
Textbook
Read pages 390–391.
IQRA UNIVERSITY
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PROPERTY, PLANT AND EQUIPMENT
Activity
Brief Exercise 9.1 on page 415.
Part 2: Depreciation Methods
This part discussed the concept of depreciation which is a process of allocating the cost of an
asset to expense over the asset’s useful life. The first method is Straight Line Method in which
equal portion of the cost of an asset is recognized as a depreciation expense in each period of the
useful life on the asset. The graph below shows that depreciation expense under this method
remains constant over the useful life of an asset;
Annual Depreciaion
Expense
12 000
7 000
2 000
1
2
3
4
5
Years
The second method is Declining Balance Method in which an accelerated depreciation rate is
computed and is applied to the opening book value. The graph below shows that depreciation
expense under this method would be high in early years and smaller in the later years of the
asset’s useful life;
Annual Depreciaion
Expense
9 000
6 000
3 000
1
2
3
4
5
Years
The last method is MACRS which stands for Modified Accelerated Cost Recovery System.
Companies may use straight line method but most prefer this method because of its favorable tax
consequences.
IQRA UNIVERSITY
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PROPERTY, PLANT AND EQUIPMENT
Textbook
Read pages 391-397..
Activity
Solve the following exercises;
Brief Exercise 9.3 on page 415.
Brief Exercise 9.6 on page 415.
Exercise 9.2 on page 417.
Exercise 9.3 on page 417.
Exercise 9.7 on page 417.
Conclusion
This lecture covered two major objectives:


Understanding the difference between capital and revenue expenditures.
Learning the depreciation methods.
References
Financial & Managerial Accounting, The basis for Business Decisions, 17th edition, (2017),
Williams, Hakka, Bettner, and Carcello.
IQRA UNIVERSITY
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