In accounting, the term for equipment typically falls under the category of "Property, Plant, and Equipment" (PP&E), which is a long-term asset account on the balance sheet. Equipment is considered a tangible asset because it has a physical form and is used in the operations of a business to generate revenue. It is not intended for sale in the ordinary course of business.

Key Characteristics of Equipment in Accounting:

1. Tangible Asset: Equipment is a physical asset, such as machinery, computers, vehicles, or tools, that a company uses to produce goods or services.
2. Long-Term Use: Equipment is expected to provide economic benefits to the business for more than one year.
3. Depreciation: Since equipment loses value over time due to wear and tear, it is subject to depreciation. Depreciation is the process of allocating the cost of the equipment over its useful life.
4. Capital Expenditure: The purchase of equipment is considered a capital expenditure (CapEx) because it is a significant investment that provides long-term value to the business.

Accounting Treatment for Equipment:

1. Initial Recognition: When equipment is purchased, it is recorded at its historical cost, which includes the purchase price, taxes, shipping fees, installation costs, and any other expenses necessary to prepare the equipment for use.

   • Example: If a company buys a machine for $50,000, pays $2,000 for shipping, and $3,000 for installation, the total cost of the equipment would be $55,000.
   • Journal Entry:

     Dr. Equipment (Asset) $55,000
        Cr. Cash/Bank $55,000

2. Depreciation: Over time, the equipment's value is reduced through depreciation. The most common methods of depreciation are:

   • Straight-Line Method: Depreciation expense is evenly spread over the useful life of the equipment.
   • Declining Balance Method: A higher depreciation expense is recorded in the early years of the equipment's life.
   • Units of Production Method: Depreciation is based on the actual usage of the equipment.
   • Example: If the $55,000 machine has a useful life of 10 years and no salvage value, the annual depreciation expense using the straight-line method would be $5,500.
   • Journal Entry:

     Dr. Depreciation Expense $5,500
        Cr. Accumulated Depreciation - Equipment $5,500

3. Impairment: If the equipment's market value drops significantly and is not expected to recover, it may be written down to its recoverable amount. This is known as impairment.

   • Example: If the machine's market value drops to $30,000 and its carrying amount is $40,000, an impairment loss of $10,000 would be recognized.
   • Journal Entry:

     Dr. Impairment Loss $10,000
        Cr. Equipment $10,000

4. Disposal: When equipment is sold, retired, or scrapped, it is removed from the books. Any gain or loss on disposal is recognized in the income statement.

   • Example: If the machine is sold for $20,000 after 5 years, and its carrying amount is $27,500 ($55,000 - $27,500 accumulated depreciation), a loss of $7,500 would be recognized.
   • Journal Entry:

     Dr. Cash $20,000
        Dr. Accumulated Depreciation - Equipment $27,500
        Dr. Loss on Disposal $7,500
        Cr. Equipment $55,000

Importance of Equipment in Financial Statements:

• Balance Sheet: Equipment is reported under PP&E on the balance sheet, net of accumulated depreciation.
• Income Statement: Depreciation expense is recorded on the income statement, reducing net income.
• Cash Flow Statement: The purchase of equipment is reported as a cash outflow in the investing activities section, while depreciation is added back to net income in the operating activities section (since it is a non-cash expense).

Example of Equipment in Financial Statements:

Balance Sheet (Extract):

Property, Plant, and Equipment (PP&E):
   Equipment (at cost)          $55,000
   Less: Accumulated Depreciation ($27,500)
   Net Equipment                $27,500

Income Statement (Extract):

Depreciation Expense           $5,500

Cash Flow Statement (Extract):

Cash Flows from Investing Activities:
   Purchase of Equipment        ($55,000)
Cash Flows from Operating Activities:
   Depreciation Expense         $5,500

In summary, equipment is a critical asset for many businesses, and its proper accounting treatment ensures accurate financial reporting and compliance with accounting standards such as GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards).