Loose tools are simple instruments, devices, or equipment that aid in improving the function of fixed assets.
These tools don’t bring a significant operational change but are merit-worthy in catering to the business needs.
For example, a screwdriver helps fix the screws of plants and machinery, so the machinery’s operation is not interrupted.
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Example
Let’s understand this concept through real-life instances.
We use four-wheelers in our daily lives for business and personal purposes. Gas is the fuel that keeps your car running. But what about the Air to be filled in the tire?
Can we assume that’s the most critical tool for the operation of your vehicle?
Probably not.
Alternatively, can we ignore that and drive the car with a flat tire?
The answer is an obvious no.
Air for the vehicle is equivalent to the loose tools used for the fixed assets.
Runners’ Insight: Air is not a Loose tool for the automobile industry. The above example is just for understanding.
What’s the accounting treatment for loose tools?
Business enterprises follow varied accounting treatments. There is no “rule” as such. However, one should adopt a general practice.
The first approach is to record it similarly to the raw materials. In other words, record the activity (the purchases and consumption during the year). Thus, this account will have a running balance.
Closing Loose tools = Beginning balance + Purchases – Consumption.
Note: Unlike Inventory, there is less chance of purchase returns.
Considering the nature of this asset, it qualifies as a current asset. Their life has a limit.
The second approach considers it an expense and charges it off in the same year of purchase.
Frequently Asked Questions
Are loose tools a non-current asset?
Let’s understand the answer with a simple real-life example. We all use smartphones and calculator covers.
Smartphones are durable assets that last more than a year. So, they qualify as non-current assets.
But what’s the longevity of the Calculator?
Does it last for more than a year?
Yes, it does.
However, considering its quantitative significance, we will not consider it a long-term asset. We can charge it as an expense.
Calculators are similar to loose tools, so they’re not non-current assets. However, considering their continued use, businesses record their Inventory and track the purchases and consumption history of all such tools.
Where do these tools go in final accounts?
Loose tools are part of the balance sheet as they fall under the group of current assets.
How can I track my loose tools Inventory?
Every penny needs to be accounted for. The business must maintain a record of the Loose tools balance at the Beginning of the year, purchases and consumption during the year, and the leftover (closing balance). Accounting for activity at each department level can give more control over the stock.
How often should I conduct audits of my loose tools inventory?
Loose tools inventory audits shall be conducted periodically (once a year or half-yearly). There is no fixed timing that works well for all businesses. It depends on the volume of tools and their purchase and consumption requirements.
What are the benefits of implementing an accounting system for these tools?
Ensuring to keep track of the expenses or assets helps in the following
- Optimizing the resources at hand
- Planning for the next production cycle
- Aids in cost reduction
- Supports timely decision-making
Let’s understand this with an example. Assume a Power Generation Company—Win Next Solutions. The company generates, transmits, and distributes solar and wind electricity. This business requires solar panels, inverters, turbines, etc.
Machines need human intervention to ensure smooth functioning. They can undergo overhauls, maintenance, repairs, malfunctions, etc. So, the entity maintains a stock of loose tools, such as a power and hand tools kit and a Multi-Function PV tester.
Let’s understand the consequences of not maintaining a proper record.
The proper stock of these tools in the solar division helps meet the immediate requirements of the wind generation facility. If no suitable controls are established, there could be delays in electricity generation, transmission, and distribution.
Further, an accurate record of the tools eliminates duplicate purchases.
Conclusion
Loose tools are insignificant in dollar terms, yet play a crucial role in business operations by facilitating the smooth functioning of Fixed Assets. Even if these tools are meant to last more than a year, considering their nature, it’s fair to call them current assets instead of recognizing them as non-current assets.
Generally, it’s customary practice to write off-nominal charges as expenses. However, considering their use, recurring nature, and life, they are recorded as current assets, and usually, all the purchases, consumption, and remaining balance as of the date are tracked. Tracking these tools reduces redundant spending, supports decision-making, and ensures the resources are shared between the various departments.
Mere recording and tracking of these tools will not help the business achieve the previously mentioned benefits. Periodic checks, inspections, or audits facilitate uncovering any inefficiencies in these records and usage.
