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Writing Off Plant Assets from Financial Statements

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  • 0:04 Calculate Your Net Worth
  • 1:49 Write-Off of a Plant
  • 3:30 Lesson Summary
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Lesson Transcript
Instructor: Douglas Stockbridge

DJ Stockbridge is currently pursuing a Masters degree in Accounting.

In this lesson, we'll discuss how accountants write off a plant, property, or equipment from the balance sheet. We'll use two examples: one from a personal balance sheet and another from an electric utility who just bought a power plant.

Calculate Your Net Worth

Let's imagine that your entire net worth is composed of three items:

  1. Cash you have in the bank of $10,000
  2. Your investment account of $50,000
  3. An antique car you grandfather gave you that he said is worth $20,000

Assuming you have no liabilities, what is your net worth in this simple example? It's $80,000. Now, let's fast forward one year into the future. Your cash is still $10,000. Your investment account has grown to $55,000, and your car is still worth $20,000. Your net worth is now $85,000 and the difference in net worth, $5,000, is equivalent to your earnings in that year.

The $5,000 would be recorded on your personal Income Statement, which acts as the bridge between your personal Balance Sheets. Now, what if you took the car to an antique car expert and he said it wasn't worth $20,000, but instead was only worth $5,000? Yikes! What's your new net worth? It would decrease from $85,000 to $70,000. Your Income Statement, as the bridge between the two balance sheets, would record a $15,000 loss.

This same logic applies to companies when they write-off a plant, property or equipment (PPE). When the book value of PPE is less than its actual value, then book value is lowered and a change on the Income Statement is recorded.

In this lesson, we'll give a general definition of a write-off of PPE, then we'll work through an example so we can see the journal entries and impact on the Balance Sheet and Income Statements.

Write-Off of a Plant

A write-off is a reduction in book value. You can write off many of different things, like inventory, equipment, buildings, plants, and property. For this example, we'll assume that we are writing off a plant. Assume you are the accountant at a large electric utility. Your company just bought a new coal-fired power plant for $100M in cash. The journal entry you'd record would look like this:


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