Plant Assets and Depreciation Making Accounting Relevant The assets that a business owns help the business earn revenue. For example, a delivery truck (an asset) earns revenue for a delivery service business. Making Accounting Relevant The assets that a business owns help the business earn revenue. For example, a delivery truck (an asset) earns revenue for a delivery service business. What assets do you have that help you carry on your daily activities? Do these items wear out? Will they have to be replaced?

Section 1Plant Assets and Equipment What You’ll Learn  How to identify plant assets.  How to allocate the cost of a plant asset over its useful life. What You’ll Learn  How to identify plant assets.  How to allocate the cost of a plant asset over its useful life.

Why It’s Important Assets, such as buildings and machinery, are used for more than one accounting period, so the cost of these assets is spread over a number of years. Why It’s Important Assets, such as buildings and machinery, are used for more than one accounting period, so the cost of these assets is spread over a number of years. Key Terms  current assets  plant assets  straight-line depreciation Key Terms  current assets  plant assets  straight-line depreciation Section 1Plant Assets and Equipment (cont'd.)  depreciation  disposal value  depreciation  disposal value

Current and Plant Assets Section 1Plant Assets and Equipment (cont'd.) Current Assets Assets that are either consumed or converted to cash during the normal operating cycle of the business, usually one year. Examples are: Current Assets Assets that are either consumed or converted to cash during the normal operating cycle of the business, usually one year. Examples are:  cash  accounts receivable (collect cash from charge customers within a short period of time)  merchandise (sold within a short period of time)  cash  accounts receivable (collect cash from charge customers within a short period of time)  merchandise (sold within a short period of time) Plant Assets Long-lived assets that are used in the production or sale of other assets or services over several accounting periods. Examples are: Plant Assets Long-lived assets that are used in the production or sale of other assets or services over several accounting periods. Examples are:  land  buildings  delivery equipment  store equipment  office equipment  land  buildings  delivery equipment  store equipment  office equipment

Allocating the Cost of Plant Asset  Allocating the cost of a plant asset over that asset’s useful life is called depreciation.  All plant assets are depreciated, except for land.  Allocating the cost of a plant asset over that asset’s useful life is called depreciation.  All plant assets are depreciated, except for land. Section 1Plant Assets and Equipment (cont'd.)

Estimating Depreciation of a Plant Asset There are four factors used to calculate depreciation: Estimating Depreciation of a Plant Asset There are four factors used to calculate depreciation:  the cost of the plant asset  the cost of the plant asset Section 1Plant Assets and Equipment (cont'd.)  the estimated useful life of the asset  the estimated useful life of the asset  the estimated disposal value of the asset  the estimated disposal value of the asset  the depreciation method used  the depreciation method used

Plant Asset Cost The price paid for the asset plus any sales taxes, delivery charges, and installation charges. Plant Asset Cost The price paid for the asset plus any sales taxes, delivery charges, and installation charges. Section 1Plant Assets and Equipment (cont'd.)

Estimated Useful Life of a Plant Asset The number of years the asset is expected to be used before it wears out, becomes outdated, or is no longer needed by the business. Estimated Useful Life of a Plant Asset The number of years the asset is expected to be used before it wears out, becomes outdated, or is no longer needed by the business. Section 1Plant Assets and Equipment (cont'd.)

Estimated Disposal Value of a Plant Asset The estimated value of a plant asset at its replacement time is called disposal value. Estimated Disposal Value of a Plant Asset The estimated value of a plant asset at its replacement time is called disposal value. Section 1Plant Assets and Equipment (cont'd.)

Depreciation Method  Straight-line depreciation equally distributes the depreciation expense over an asset’s estimated useful life.  Units-of-production method estimates useful life measured in units of use rather than units of time.  Accelerated depreciation methods are based on the theory that an asset loses more value in the early years of its useful life than in the later years. Depreciation Method  Straight-line depreciation equally distributes the depreciation expense over an asset’s estimated useful life.  Units-of-production method estimates useful life measured in units of use rather than units of time.  Accelerated depreciation methods are based on the theory that an asset loses more value in the early years of its useful life than in the later years. Section 1Plant Assets and Equipment (cont'd.)

Check Your Understanding List three examples of plant assets that are depreciated. Which plant asset should not be depreciated? Section 1Plant Assets and Equipment (cont'd.)