The term plant assets is used to describe long- term assets that are used in the operation of a business, and that are
not intended for resale to customers. Among the more common examples of plant assets are land, land
improvements, buildings, machinery, furniture and fixtures, vehicles, and office equipment. The term fixed assets
has been used widely in accounting literature to describe all kinds of plant assets. Recently, more and more
companies are using the term property, plant and equipment for these assets. The main issues in the discussion of
PPE are: • Acquisition cost, • Valuation, • Depreciation, • Repairs and betterments, and • Disposals.
In order to be able to use the machine for its intended purpose, the company incurs all of the above costs.
Therefore, the accounting standards recognize the total amount as the cost of the asset. 1 Note that value added tax
is not included, because the amount of value added tax paid for the machine will be deducted in the same year from
the value added tax collected through revenues. 2 At this point, one question that might come to mind is why all the
incidental charges relating to the acquisition of the assets are included in the cost. The reason is the matching
principle, i. e., the need for matching revenues and expenses of the same period. Since the company intends to use
the machine for more than a year, it expects that the machine will generate revenues throughout its useful life.
Recall that an asset becomes an expense when it is used up or consumed. Therefore, as a PPE is used during a
period, a portion of it becomes an expense in that period. Consequently, the total cost of the machine should be
recorded as an asset originally, and then charged to the revenue of the years it is used in operations. Another
example of a purchased asset is land. When purchasing land, various incidental costs are incurred in addition to the
purchase price. Some examples of these costs are commissions, legal fees, and the expenditures incurred for grading
and clearing the property for its intended use. All of these, and similar items, are included in the cost of land.
Sometimes several assets are purchased together in a basket agreement. If, for example, land and a building are
purchased together, then the cost of land and the cost of the building should be separately determined. The main
reason for this is that land is not depreciated, because it is believed to have an unlimited life. In such cases, the fair
values of both assets are estimated and the percentage of each asset in total fair value is applied to the acquisition
cost, in order to determine each asset’s share of the cost. For example, DILLI A. r. acquired land with a building for TL
100.000 on 5 March 2014. The fair value of the land is estimated to be 90.000 and the building 60.000. Then, the
journal entry to record the purchase is:
After initially recording property, plant and equipment, a company may continue to value it at cost or the company
may revalue the asset to its fair value, as long as the fair value can be determined reasonably.
Property, plant and equipment, with the exception of land, have limited useful lives. Depreciation is the systematic
expiration of the cost of such assets over their useful lives. The cost of a property, plant or equipment is like a
prepaid rent or prepaid insurance; it is a payment in advance for services to be received in the future. Hence, as a
machine is used in each accounting period in the operations, the entity recog-nizes a related expense, i. e., the cost
of that machine gradually expires. The basic principle behind this procedure is the matching principle. In other
words, the revenues of a period are matched against all the expenses incurred in that period in order to generate
that revenue. In daily conversation, “ depreciation” usually connotes a decline in the market value of an asset.
However, in accounting terminology, depreciation is not a loss of value; it is a cost allocation process. The causes of
depreciation are the decline in an asset’s productive capacity and/ or its obsolescence. The main reason for a decline
in productive capacity is the physical condition of assets, including factors like wear and tear from regular usage.
However, as acutely demonstrated in the case of computers, some assets may become obsolete in a very short
period of time, although their productive capacity may still be intact. Another common misunderstanding is that
depreciation accounting automatically provides the cash required to replace the asset as it wears out. The cash
account is not affected by the process; it neither declines nor increases by the periodic depreciation entries that
transfer the cost of plant assets to depre-ciation expense accounts. Depreciation expense is a non- cash expense that
is charged to revenue, thus decreasing the tax base and the related tax payment, which results in cash savings. In
each period, the depreciation expense is calculated for each type of asset, and the amounts are credited to the
accumulated depreciation accounts of that type of asset. The balance in the accumulated depreciation account
shows the amount of total cost that is charged to expense; it does not represent a cash fund. Consider the following
adjusting entry, for example:
for different types of assets. The main concern is to apply these methods consistently over the years. Regardless of
the method chosen, various estimations are made to determine the depreciation amount. The ultimate aim is to
allocate the cost of the asset over its useful life. Here, the main question is how to estimate the useful life of the
asset. IFRS states that the following factors need to be considered in estimat-ing useful life:
1. The expected usage of the asset by the company,
2. Expected physical wear and tear,
3. Technical or commercial obsolescence of the assets, or the changes in demand for the product pro-duced by the
asset, and
4. Legal or similar limits on the useful life of the asset.
Considering all the above factors, management determines the useful life of the asset. The next estima-tion concerns
the residual value ( or the salvage value). Salvage value is the current estimated amount that an entity would expect
to receive for the sale or disposal of an asset, hypothetically assuming that the asset is already of the age and in the
condition expected at the end of its useful life. The salvage value is important because it is used to determine the
depreciable amount in some depreciation methods. In those methods, the depreciable amount of an asset is
determined by deducting the salvage value from its cost. Assets with zero book values are fully depreciated.
The available depreciation methods can be grouped as time- based or production- based methods. The main
premise of the time- based methods is that the productive capacity of an asset declines over time. The most
common time- based method is one you’re already familiar with – straight- line depreciation. The other common
time- based method is the declining- balance or the double- declining method. The most common production- based
method is the units- of- production method. Management selects the method that best approximates the benefi ts
that would be obtained from an asset, based on its estimated useful life and intended use. In Turkey, most
companies choose either the declining balance or the straight- line method. The reason for choosing declining
balance is the tax advantage. In other words, when companies use the double- declining method, they deduct more
depreciation expense from revenues and thus pay less tax in the early years of the life of an asset.
methods, the amount of depreciation expense declines from one year to the next. The most common declining
method is the double- declining method, where the depreciation rate is twice the straight- line rate. Thus, the
declining method is commonly referred to as the double- declining method. The main difference between the
declining and the straight- line methods lies in the amount of depreciable amount each year. Although the
depreciation rate stays the same from year to year, the depreciable amount declines every year under the declining
methods. The depreciable amount in the declining method is the book value of the asset at the beginning of the
period. Unlike in other methods of depreciation, salvage value is not deducted to determine the depreciable
amount. Salvage value determines the period the depreciation stops. In other words, depreciation stops when the
book value of the asset is equal to the estimated salvage value. Using the above example, let’s demonstrate the
double- declining method:
When an asset is sold, the amount of gain or loss is determined by comparing the book value with the proceeds from
the sale. In this example, the book value is TL 44.200 – 38.250 = TL 5.950 and the sale price is TL 7.600. Since the
asset was sold for an amount greater than the book value, it is sold at a gain. If it were sold for an amount less than
the book value, then it would have been sold at a loss. If the amount of gain or loss is material, then it should be
disclosed separately in the income statement of the period during which the sale takes place. 3 If an asset is sold at
the book value, then no gain or loss is recognized. When an asset is scrapped after it is fully depreciated, then a debit
entry to the accumulated depreciation account and a credit entry to the PPE account by the same amount are
necessary. When an asset is traded with another item, the required journal entry is similar to the sale entry. For
example, assume that a company exchanges old equipment that has a cost of TL 4.000 and accumulated
depreciation of TL 3.200 ( thus, book value of TL 800) with new equipment that has a price of TL 5.000 and a trade- in
allowance of TL 1.100 on 30 April 2013. Therefore, the implied price of the old equipment is TL 1.100 ( trade- in
value). Thus, the gain on this exchange is TL 300 ( price less book value or TL 1.100 – TL 800). The journal entry to
record this exchange is: