In accounting, equipment is a long-term asset account that records the cost of machinery, tools, computers, and similar physical items that a business uses to operate over more than one year. Equipment is not held for sale to customers; it is used to make products, provide services or run the business. It is reported on the balance sheet within property, plant and equipment, at cost less accumulated depreciation.
Many businesses split equipment into more specific accounts, such as manufacturing equipment, office equipment, delivery equipment and computer equipment, with furniture and fixtures kept separately. Each has its own accumulated depreciation account. Equipment is one of the main classes of fixed assets, alongside land and buildings.
Equipment in plain terms
A dentist's chair, X-ray machine and computer are all equipment. The dentist buys them once and uses them for years to treat patients. The cotton swabs and gloves used during each appointment are different: they are used up straight away.
Accounting treats these two kinds of purchase differently. Supplies are counted as a cost when they are used. Equipment is recorded as something the business owns, and its cost is spread over the years it is useful, so that each year carries a fair share of the cost of the tools that helped earn that year's income.
What is recorded as equipment
An item is recorded as equipment when it is tangible, used in operations, expected to last more than a year and costs more than the company's capitalization threshold. That threshold is a practical application of materiality: a $30 drill is usually expensed at once, while a $30,000 lathe is capitalized. Thresholds vary by business, and some are aligned with the de minimis safe harbor in US tax rules.
Under the cost principle, equipment is recorded at all costs needed to acquire it and prepare it for use. These include the purchase price less discounts, sales tax, freight, installation, testing and any modifications made before use. Costs of training staff, annual service contracts and repairs after the equipment is in service are expensed. For example, a machine with an invoice price of $85,000, freight of $2,500, installation of $4,000 and sales tax of $5,100 is recorded at $96,600 with a debit to Equipment and a credit to Cash or Accounts Payable.
Depreciation and later spending
Except for any salvage value, equipment cost is spread over its useful life through depreciation. Each period, depreciation expense on equipment is debited and accumulated depreciation on equipment is credited. Straight-line, declining-balance and units-of-production methods are all common.
Later spending is classified by its effect. Spending that extends the life, raises capacity or improves output is a capital expenditure and is added to the asset. Routine maintenance and minor repairs are revenue expenditures and are expensed as incurred.
Disposal and impairment
When equipment is sold, traded in or scrapped, depreciation is first brought up to date. The equipment's cost and accumulated depreciation are then removed, and any difference between the proceeds and the carrying value is recorded as a gain or loss. The steps are covered under disposal of fixed assets.
If events suggest that equipment may not recover its carrying value, such as a sharp fall in demand for what it produces or physical damage, US GAAP requires a recoverability test. If the carrying value exceeds the undiscounted future cash flows the equipment is expected to generate, it is written down to fair value and an impairment loss is recognized.
Equipment and tax
For US federal income tax, equipment is depreciated under the modified accelerated cost recovery system, which assigns recovery periods by asset class, often five or seven years for business machinery. Qualifying equipment may be expensed immediately under Section 179, within annual limits, or through bonus depreciation. These rules mean tax depreciation frequently differs from the depreciation reported in financial statements.
Businesses usually keep a fixed-asset register that lists each item of equipment with its tag number, location, cost, in-service date, book and tax depreciation methods, and accumulated depreciation under each. The register supports the general ledger balance, the tax return and the annual physical check that equipment on the books still exists and is still in use. Items found to be missing, idle or obsolete during that check are investigated and, where appropriate, written off or written down.