Assets that have physical existence and that are expected to be used in revenue-generating operations for more than one year or operating cycle, whichever is longer, are classified as plant assets. Some problems may arise in determining the acquisition cost of a plant asset. For example, the initial acquisition may be the result of several expenditures or additional expenditures may be involved subsequent to acquisition.
Expenses arise from the cost of goods or services that are consumed in the process of generating revenue. When a long-term tangible asset (plant asset) is acquired, it actually represents a bundle of future asset services. The total cost of these services equals the acquisition cost of the asset minus the asset's expected market value at the end of its useful life. As a productive asset is used, services (benefits) are consumed; therefore, a portion of the original asset cost should be charged to expense, in order to comply with the expense recognition (matching) principle. The process of allocating (expensing) the cost of long-term tangible assets over the accounting periods during which the asset is used is called depreciation.
An entity commonly disposes of plant assets before or at the end of their estimated service lives. The disposal may be by retirement, sale or exchange. The asset's fair value will usually differ from its book value at the date of disposal, and this difference usually results in recognizing a gain or loss on disposal.