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Fixed Assets, PP&E and Accumulated Depreciation
Links to further reading on depreciation
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Fixed assets are long-term
assets that are tangible.
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These are things like property and
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equipment, buildings, land, and
other things of that nature.
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Sometimes on financial statements, these
will be listed out as separate line items,
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or you might just see property and
equipment.
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Another common acronym related
to fixed assets is PP&E,
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which stands for property,
plant, and equipment.
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With PP&E, we see a return of gross and
net terminology.
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Gross PP&E and net PP&E,
what's the difference?
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When you buy a piece of machinery,
you have a cost that you paid for it,
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that goes into your accounts as a gross
asset for whatever price you paid for it.
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Then, over time,
that asset will depreciate each year,
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over the years, this depreciation adds up.
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You will see this as a sum total
called accumulated depreciation.
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So the gross value of the asset minus
the accumulated depreciation for
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the asset equals the net
value of the asset.
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Let's walk through
a simple example of that.
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So, here we are looking at a very simple
example of a depreciation schedule.
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We see our purchase price
of the asset is $1 million.
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The useful life of the asset is ten years.
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And, since we're gonna depreciate
this asset on the straight line basis
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over the ten years,
our annual depreciation rate is 10%.
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So our depreciation expense,
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which would show up on the P&L is
$100,000 a year for ten years.
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The gross asset value remains $1
million throughout the ten year life,
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but the accumulated depreciation
increases each year.
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And in sync with the increase
in accumulated depreciation,
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the net asset value decreases.
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So at the end of ten years,
the net asset value of this asset is zero.
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Now, this is a very
oversimplified example.
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As you can imagine, businesses will
have many different types of PP&E,
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or several of the same type that
they purchase at different times and
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maybe depreciate on different schedules.
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So for example,
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a company might depreciate computers over
three years but tractors over seven.
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They might buy 100 computers spread
out over the course of the year.
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This means that all these assets are on
a different depreciation schedule.
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This can be a specific job or team role of
an accounting department at big companies,
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tracking depreciation schedules for
assets.
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That said, when you see a balance
sheet for December 31st,
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the grossed fixed assets
accumulated depreciation and
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net fixed assets will be the snapshot for
all the company's assets at
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that point in time regardless of where
they are on the depreciation schedule.
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One thing to note is that in accounting,
land doesn't depreciate.
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So you might see land value consolidated
in a grossed fixed asset line, but
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it won't impact accumulated depreciation.
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Again, we're starting to touch
on some more advanced topics.
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For example, what happens if
an asset is fully depreciated but
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still provides economic value or
use to the business?
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In the interest of time, we're not
gonna be covering that in this course.
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But in the teacher's notes, I provided
some links for further exploration.
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