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

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Deepak Gupta (Querist)
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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.

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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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.