Definition
The financial accounting term additions to property, plant, and equipment refers to one type of cost subsequent to acquisition. Additions are defined as an increase or expansion of these assets and the cost is typically capitalized.
Explanation
Subsequent to assets being placed into service, they oftentimes require additional investments to either improve or maintain their productivity. Additions are one of four categories of these investments; the others include improvements, reinstallations and rearrangements, and repairs.
To capitalize costs associated with existing property, plant, and equipment, one of the following three conditions must be met:
The quality of output is enhanced in some manner. The units produced contain functionality that was not present prior to the investment.
The useful life of the asset is extended. For example, the expected service life of the asset is longer after the investment.
The capacity or productivity of the equipment increases. The units of output are higher.
By their very nature, additions to assets involve the creation or expansion of the capacity or output of an existing asset. For this reason, nearly all additions qualify for capitalization, and need not be expensed.
Oftentimes an addition can include a change to an existing structure. For example, an exterior wall of a building may be torn down to accommodate a new wing. If the company did not anticipate the destruction of this part of the asset, the loss in value should be reported (expensed) in the current period. If the original plans included the eventual expansion of a facility, the cost of this removal can be included in the capitalized cost of the addition.
In practice, companies do not eliminate the cost of the removed property from the original asset account and continue to depreciate the entire historical value.
Related Terms
- The financial accounting term property, plant, and equipment is used to describe assets of a long lasting nature, which are used in the normal operation of the company. The most common types of property, plant, and equipment are land, buildings, and machinery.
Moneyzine EditorSeptember 21st, 2023 
The financial accounting term costs subsequent to acquisition refers to additional expenditures associated with property, plant and equipment. In general, companies make four types of investments in existing assets: additions to plant, improvements, reinstallations and repairs.Moneyzine EditorNovember 6th, 2024
The financial accounting term improvements and replacements refers to a category of cost subsequent to acquisition. A replacement occurs when a similar asset is substituted for the original asset, while an improvement involves the substitution for a more advanced asset.Moneyzine EditorNovember 6th, 2024- The financial accounting term reinstallation and rearrangement refers to a category of cost subsequent to acquisition. A rearrangement or reinstallation occurs when equipment is moved from one location and installed in another. This is typically performed to increase production at the receiving location.Moneyzine EditorSeptember 21st, 2023
- The financial accounting term repairs to property, plant, and equipment refers to a category of cost subsequent to acquisition. Repairs are typically broken down into two subcategories: ordinary and major. Ordinary repairs are typically expensed, while major repairs may be capitalized if certain criteria are met.Moneyzine EditorSeptember 21st, 2023
The financial accounting term disposition of property, plant, and equipment refers to the disposal of the company's assets. This can include the sale, exchange, abandonment, and involuntary termination of the asset's service. Disposition of plant typically results in a gain or loss appearing on the company's income statement.Moneyzine EditorJanuary 16th, 2024- The term sale of property, plant, and equipment refers to the selling or exchange of the company's assets. When the sale of property, plant, or equipment occurs, the company must compare the asset's original purchase price and accumulated depreciation to its selling price to determine if there was a gain or loss on the transaction.Moneyzine EditorSeptember 21st, 2023
The term involuntary conversion refers to the unscheduled termination of property, plant, and equipment's service as the result of an unwanted event such as a fire, flood, or even theft. When the involuntary conversion of assets occurs, the company must compare the assets' original purchase price and accumulated depreciation to the disposition price to determine if there was a gain or loss on the conversion.Moneyzine EditorNovember 6th, 2024- The financial accounting term service life is used to describe the period of time over which an asset can be expected to perform its intended use. Service life is typically limited by two factors: physical wear and obsolescence.Moneyzine EditorSeptember 21st, 2023
The term acquisition cost refers to the total of all the expenses associated with placing an asset into service. Acquisition cost is a managerial concept believed to more accurately reflect the total resources related to the purchase of an asset.Moneyzine EditorJanuary 4th, 2024
