Property, Plant and Equipment
Non-current assets are the long-lived tools of the business. They wear out, lose value and eventually need replacement. This study unit covers how to cost them correctly, calculate depreciation using three methods, and account for disposals — including scrapping, selling and trading in.
- What is property, plant and equipment
- Determining the cost price
- Assets register and control
- The concept of depreciation
- Recording depreciation
- The three depreciation methods
- Straight-line method
- Diminishing balance method
- Production unit method
- Acquisitions during the year
- Disposal of PPE — the 6-step procedure
- Disposal scenarios
- SFP presentation and PPE note
- Depreciation calculator
- Worked exercises
- Quick quiz
1. What is property, plant and equipment
Property, plant and equipment (PPE) are tangible non-current assets held for use in the production of goods or services, for rental, or for administrative purposes, and expected to be used for more than one financial period. Examples include land and buildings, machinery, vehicles, furniture and equipment.
2. Determining the cost price
The historical cost price of PPE includes everything spent to get the asset ready for use:
- Purchase price less trade discount
- Transport and delivery costs to get the asset to the premises
- Installation costs, including wages of own technical personnel
- Any other cost incurred in getting the asset operational
▸ Financing costs (interest on loans to buy the asset)
▸ Ongoing maintenance and repair costs
▸ Operating costs once the asset is in use
Bilgredon — cost calculation example
Machine purchased for R500 000 with a discount of R60 000. Transport R15 000. Installation R5 000.
Less: Trade discount (R60 000)
Add: Transport R15 000
Add: Installation R5 000
Historical cost price R460 000
3. Assets register and control
An assets register is maintained for all PPE. It records per asset: location, serial number, cost price, date of acquisition, expected lifespan, carrying amount, current year’s depreciation, and accumulated depreciation.
4. The concept of depreciation
PPE loses value as it is used. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. It is an expense charged to the income statement every year — matching the cost of using the asset against the income it helps generate.
▸ Depreciable amount = Cost price − Residual (scrap) value
▸ Residual value = Estimated value of the asset at end of its useful life (trade-in/scrap value)
▸ Carrying amount = Cost price − Accumulated depreciation (= net book value)
▸ Useful life = The period over which the asset is expected to be used by the entity
5. Recording depreciation
Depreciation is an annual year-end adjustment recorded in the general journal. The asset account itself is never reduced — instead, the accumulated depreciation account (a contra-asset with a credit balance) accumulates the total depreciation charged to date.
6. The three depreciation methods
Annual depreciation =
Cost ÷ Lifespan
or Cost × Rate%
Carrying amount decreases by equal amounts until it reaches NIL (or residual value).
Annual depreciation =
Carrying amount × Rate%
Carrying amount will mathematically never reach NIL.
Annual depreciation =
(Units this year ÷ Total expected units) × Cost
Depreciation varies with actual output each year.
7. Straight-line method — Bilgredon example
Machine cost R460 000 (after discount, transport, installation). Estimated lifespan: 5 years. No residual value. Financial year ends 31 May.
| Year (May 31) | Cost (R) | Annual Depreciation (R) | Accumulated Dep. (R) | Carrying Amount (R) |
|---|---|---|---|---|
| 20.1 (Year 1) | 460 000 | 92 000 | 92 000 | 368 000 |
| 20.2 (Year 2) | 460 000 | 92 000 | 184 000 | 276 000 |
| 20.3 (Year 3) | 460 000 | 92 000 | 276 000 | 184 000 |
| 20.4 (Year 4) | 460 000 | 92 000 | 368 000 | 92 000 |
| 20.5 (Year 5) | 460 000 | 92 000 | 460 000 | NIL |
| Total | 460 000 |
8. Diminishing balance method — Bilgredon example
Same machine (R460 000 cost, 5 years). Rate: 20% per year on the carrying amount.
| Year (May 31) | Cost (R) | Annual Depreciation (R) | Accumulated Dep. (R) | Carrying Amount (R) |
|---|---|---|---|---|
| 20.1 (Year 1) | 460 000 | 92 000 | 92 000 | 368 000 |
| 20.2 (Year 2) | 460 000 | 73 600 | 165 600 | 294 400 |
| 20.3 (Year 3) | 460 000 | 58 880 | 224 480 | 235 520 |
| 20.4 (Year 4) | 460 000 | 47 104 | 271 584 | 188 416 |
| 20.5 (Year 5) | 460 000 | 37 683 | 309 267 | 150 733 |
| Total | 309 267 |
9. Production unit method — Bilgredon example
Same machine. Total expected production over 5 years: 2 000 units. Actual units: Year 1=500, Year 2=550, Year 3=300, Year 4=200, Year 5=450.
Formula: Annual depreciation = (Units produced this year ÷ Total expected units) × Cost price
| Year (May 31) | Units | Annual Depreciation (R) | Accumulated Dep. (R) | Carrying Amount (R) |
|---|---|---|---|---|
| 20.1 (Year 1) | 500 | 115 000 | 115 000 | 345 000 |
| 20.2 (Year 2) | 550 | 126 500 | 241 500 | 218 500 |
| 20.3 (Year 3) | 300 | 69 000 | 310 500 | 149 500 |
| 20.4 (Year 4) | 200 | 46 000 | 356 500 | 103 500 |
| 20.5 (Year 5) | 450 | 103 500 | 460 000 | NIL |
| Total | 2 000 | 460 000 |
10. Acquisitions during the financial year
When an asset is purchased during the financial year (not on the first day), depreciation for the first year must be calculated pro rata — only for the portion of the year the asset was in use.
First year depreciation = Cost × Rate% × (Months used ÷ 12)
Example: Machine costs R460 000. Rate 20% p.a. Purchased 6 months before year-end.
Depreciation = R460 000 × 20% × 6/12 = R46 000
The same applies when an asset is disposed of mid-year — depreciate only up to the date of disposal.
11. Disposal of PPE — the 6-step procedure
When PPE is disposed of (scrapped, sold or traded in), it must be removed from the books entirely. A Realisation account is used to capture all the entries relating to the disposal and determine the profit or loss on disposal.
Dr Depreciation: [asset] | Cr Accumulated depreciation: [asset]
Dr Accumulated depreciation: [asset] | Cr Realisation of [asset]
Dr Realisation of [asset] | Cr [Asset] at cost
Cash sale: Dr Bank | Cr Realisation of [asset]
Credit sale: Dr Debtors | Cr Realisation of [asset]
Trade-in: Dr New asset account | Cr Realisation of [asset]
If Cr side > Dr side of Realisation account → Profit
If Dr side > Cr side of Realisation account → Loss
Profit: Dr Realisation of [asset] | Cr Profit on disposal of [asset]
Loss: Dr Loss on disposal of [asset] | Cr Realisation of [asset]
12. Disposal scenarios — Bilgredon examples
Scenario A: Scrapping (no proceeds)
Machine scrapped at end of useful life under straight-line method. Accumulated depreciation = R460 000 (fully depreciated). Carrying amount = NIL.
Scenario B: Scrapping with a loss (asset not fully depreciated)
Machine scrapped at end of year 5 under production unit method. Cost R460 000, accumulated depreciation R402 500. Carrying amount R57 500. No proceeds.
Scenario C: Selling for cash at a profit
Same machine (cost R460 000, acc. dep. R402 500, carrying amount R57 500). Sold for R60 000 cash.
13. SFP presentation and PPE note
Only the carrying amount is shown on the face of the SFP. The detailed breakdown (cost, accumulated depreciation, depreciation for the year, disposals) is shown in Note 3.
| Property, plant and equipment | Machinery (R) | Total (R) |
|---|---|---|
| Carrying amount: Beginning of year | ||
| Cost | 460 000 | 460 000 |
| Accumulated depreciation | (92 000) | (92 000) |
| Carrying amount b/y | 368 000 | 368 000 |
| Additions | — | — |
| Disposals | — | — |
| Depreciation | (92 000) | (92 000) |
| Carrying amount: End of year | ||
| Cost | 460 000 | 460 000 |
| Accumulated depreciation | (184 000) | (184 000) |
| Carrying amount e/y | 276 000 | 276 000 |
14. Depreciation calculator
Calculate annual depreciation and generate a full schedule for any of the three methods.
15. Worked exercises
PPE questions in the FAC1502 exam style.
16. Quick quiz
Twelve questions on PPE.