Why Distinguish Between PPE & Long-Term Investments in Stock

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PPE, or “property, plant and equipment,” provides valuable data about corporate tangible resources that will be used for at least one year. As a measure of financial soundness, a company’s PPE account indicates to investors and the public whether the business has the appropriate amount of investment in PPE to execute its business plans. Long-term stock is an investment in the shares of other companies that the business plans to hold for more than one year. PPE and long-term stock investments both appear on the non-current assets section of the balance sheet.

PPE

  • In the competitive landscape, a company amassing substantial amounts of PPE within a short period may stoke speculation that it’s gradually building its war chest. As strategic items, PPE accounts run the gamut from commercial and residential establishments to equipment, production machinery and computer hardware. Financial accountants use the terms “PPE,” “fixed assets,” “long-term assets,” “capital resources” and “tangible assets” interchangeably. PPE calls for depreciation entries, which enable a company to allocate the costs of its PPE items over several years. The accounting entry for depreciation is: debit the depreciation expense account and credit the accumulated depreciation account.

Long-Term Stock Investments

  • A business may purchase long-term stock investments to make extra money and position itself, strategically speaking. Investment gains often provide much-needed cash and a welcome reprieve, especially if the company is in financial straits. Long-term stock investments are equity purchases that companies make with a resale outlook exceeding one year. In other words, equity holders intend to keep the securities in their portfolios for at least 12 months. Long-term investments contrast with marketable securities, which are stocks and bonds a company buys for a short-term profit motive. The accounting entry for long-term stock purchase is: debit the long-term stock investments account and credit the cash account. Crediting cash -- an asset account -- means reducing company money, unlike in the banking terminology.

Distinction

  • Various reasons dictate why accountants must distinguish PPE from long-term stock investments. For starters, accounting rules want it so. Norms such as U.S. Securities and Exchange Commission guidelines and generally accepted accounting principles require that a business separates investment items from PPE. Long-term stock investments lack physical resources, unlike PPE items. Another reason for distinguishing both items lies in the fact that financial accountants do not record depreciation on long-term stock investments. However, accountants record in a general ledger various market losses incurred in short-term stock investments, a process economists dub “marking to market.”

Correlation

  • PPE and long-term stock investments are distinct, albeit interrelated, items. Both have a long-term operating outlook and are part of a company’s statement of financial position -- which is also known as a balance sheet or statement of financial condition.

References

  • Photo Credit alzay/iStock/Getty Images
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