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Customer's tool amortization

PARESH RAM (Consultant) (33 Points)

20 December 2012

I am working as an internal auditor in an automobiles industries which produces anciallary parts of vehicles.

My doubt is : Company is taking advances from customer to make tools for a particular specified by customer

and company developing tools to manufacutre that part for that party and treats that as an asset and

credited that advance as in income after developing that tools.

Is it correct procedure to account that advances ?

Is there any statutory compliance ?

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2 Replies

CA AYUSH AGRAWAL (Kolkata-Pune-Mumbai) (26986 Points)
Replied 20 December 2012

Dear One,

Right Procedure is:-

Book Advance from Parties as Advances from Debtors Under Current Liablities.

While Processing to Manufacture of Tools, Treat as Normal Production as WIP (Stock Item).

After That When Finished Goods Comes Out, At Time of delivery, Book the Sale by Debiting Debtors Name & creditng sale as Sold.

PARESH RAM (Consultant) (33 Points)
Replied 20 December 2012

Thanks Ayush, but problem is : Customer giving advances only for making new tool shape for making new anciallary parts of a new model vehicle, so after completing that structure they will produce that parts by using that tool but after confirmation . Now companies investing money on that tool as an assets in group of machinery & tools ......so they are captilizing these tools as an assets because from that tool they are producing that a particular parts of a vehicles , that tools just like a machine so they are treating as an assets. And the customer has given advance for that particular parts based on their product specification so after successfull making of that type of tools , companies treating that advance amount as an income.

i have fully explained this case here so reply