Definition: Equipment is a type of fixed asset used by a company in its business operations and reported on the long-term assets section of the balance sheet under the line item property, plant, and equipment.
What Does Equipment Mean?
What is the definition of equipment? Simply put, a piece of equipment is a capital investment that a company has purchased to perform a specific task for the business. This could be drill press in a machine shop or car lift in a repair shop. Some other examples include machinery, hand and power tools, and/or technical apparatus. All of these assets not considered to be a liquid assets because it is difficult long term in nature and difficult to sell or convert into cash.
How do companies account for it? When equipment is purchased and placed in service, it’s capitalized instead of being expensed immediately. This makes sense because these are considered tangible, long-term assets that provide benefits to the organization over an extended period of time. The cost of the assets is then depreciated over the useful life of the equipment.
Example
Let’s say a large corporation owns a large facility with several buildings and a large parking lot that the employees use to park their vehicles. The company is so large that they have a facilities department made up of several employees who maintain the overall facility including the parking lot. In preparation for winter, the manager of the facilities department is required to purchase three snow blowers to ensure his employees have the necessary tools to clear snow from the company parking lots. The facilities manager purchases three snow blowers for $3,000 ($1,000 each), and places them into service. He estimates the snow blowers will be used for five years and all supporting documentation for the snow blowers is provided to the accounting department.
The accounting department will accumulate all supporting documentation, and generate a journal entry to capitalize the snow blowers by debiting the equipment account and crediting the cash account.
The accounting department will then book the necessary depreciation expense entry each month to properly allocate the expense over the useful life of each snow blower. The depreciation expense amount will equal $50 per month, or ($3,000 cost ÷ 5 years) ÷ 12 months.
Summary Definition
Define Equipment: a long-term asset capitalized by an organization for the purpose of performing a task associated with the business.
