Accounting of Tool/Die cost recovery through amortisation in part price

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Deepak Gupta (Querist)

24 January 2024 I have purchased a Tool/Die for production of Customer parts. Normally Customer is paying the cost of Tool upfront and it is property of Customer.
Here Customer is paying Tool/Die cost via amortisation in part price ( i.e., Cost of Tool Rs 10 Lacs, Part price settled Rs 10/Pcs, Tool cost amortised on 10 Lacs parts as Rs 1 per part, Customer PO of parts sale now Rs 10 +1 = 11/- till 10 Lacs parts). Tool ownership will be Customer only as he is paying the cost.

Please suggest the accounting of the same.

Aashok Kumar Sharma online

Aashok Kumar Sharma

(Expert)

06 July 2024 In your scenario, where the customer pays for the Tool/Die upfront and its cost is amortized over the production of parts, the accounting treatment should reflect the following:

### Initial Purchase of Tool/Die:
When the Tool/Die is purchased, the accounting entry would typically be:
- Debit: Tool/Die (Asset Account) - Rs 10,00,000
- Credit: Bank or Accounts Payable - Rs 10,00,000

### Amortization of Tool/Die Cost:
Since the customer is amortizing the Tool/Die cost over the production of parts, you will record this amortization as an expense and adjust the Tool/Die asset accordingly. Assuming the amortization is based on parts produced:

1. **Amortization Expense Recognition:**
- You need to determine the amortization per part produced. For example, if the Tool/Die cost of Rs 10,00,000 is amortized over 10,00,000 parts, the amortization expense per part would be Rs 1.

2. **Monthly Amortization Entry:**
- At the end of each accounting period (typically monthly), you would record the amortization expense. Assuming 1,00,000 parts are produced in a month:
- Debit: Amortization Expense (Expense Account) - Rs 1,00,000
- Credit: Accumulated Amortization - Tool/Die (Contra-Asset Account) - Rs 1,00,000

3. **Adjustment to Customer Billing:**
- When billing the customer for parts produced, ensure that the part price includes the amortized cost of the Tool/Die. Using your example where the customer pays Rs 11 per part:
- Debit: Accounts Receivable (or Sales Account) - Rs 11 per part
- Credit: Sales Revenue - Rs 10 per part
- Credit: Tool/Die Amortization Recovery - Rs 1 per part

### Summary of Accounting Entries:

- **Initial Purchase:**
- Debit: Tool/Die (Asset) - Rs 10,00,000
- Credit: Bank or Accounts Payable - Rs 10,00,000

- **Monthly Amortization:**
- Debit: Amortization Expense - Rs 1,00,000
- Credit: Accumulated Amortization - Tool/Die - Rs 1,00,000

- **Billing to Customer:**
- Debit: Accounts Receivable (or Sales Account) - Rs 11 per part
- Credit: Sales Revenue - Rs 10 per part
- Credit: Tool/Die Amortization Recovery - Rs 1 per part

### Reporting and Disclosure:
Ensure proper disclosure in your financial statements:
- The Tool/Die should be reported as a fixed asset on the balance sheet.
- Accumulated Amortization of the Tool/Die should be shown as a contra-asset deducted from the gross value of the Tool/Die.
- Amortization expense should be included in the income statement under operating expenses.

This approach ensures that the cost of the Tool/Die is matched with the revenue generated from its use, providing a clear picture of profitability and asset utilization.

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