In accounting for tools, different practices are encountered. Thus, the Public Service Commission for the First District of the State of New York, in its Uniform System of Accounts for Gas Corporations, authorized that, “hand and other small portable tools liable to be lost or stolen shall, when first acquired and before issued for use, be carried in a suitable Materials and Supplies account; when issued, they shall be charged to the appropriate expense account. Portable tools and apparatus of special value may, however, be charged to the appropriate tangible capital account, and remain therein so long as record is kept of the persons to whom such tools and apparatus are issued and such persons are made responsible therefor.”
Sometimes the practice is found of charging all purchases of tools to an asset account for a short period of, say, two or three years, and thereafter to a suitable expense account, with a periodic revision based on an inventory about once in five or six years. Again, the Loose Tools account may be handled just as any other asset account, i.e., charged with all purchases, credited with losses, and depreciation provided for. The manner of handling the record is not vital, any method sufficing that fits particular needs. All methods must, however, take cognizance of the fundamental distinction between capital and revenue charges and provide some means by which the Loose Tools account, as an asset account, shall represent substantially correct asset values. A successful method of securing control over the physical handling of tools, where the plant is large enough to justify it, is to place all tools when purchased in the care of a stores-keeper and issue them only on authorized requisition, thus securing an accurate record of them.
Depreciation on Hand Tools
As to the valuation of hand tools, depreciation is often left out of account on the theory that, so long as a tool can be used to perform the service expected of it, it is worth approximately what it cost. Where as an adjunct to this method of valuation, a physical inventory of tools is taken periodically and all losses so shown are charged to expense, substantially correct asset values are secured. Of course, theoretically, tools are as much subject to depreciation as other similar assets, but the method of the inventory valued at cost, and therefore disregarding depreciation, is perhaps the best practical way of handling the valuation of tools, and it gives sufficiently satisfactory results for most purposes.
Valuation of Home-Made Machinery and Tools
Machinery and tools made in own factory offer a problem in valuation. It may be stated thus: Shall such be valued at the market price at the time when made, or shall valuation be the cost to manufacture? It is argued that had the machinery been purchased on the market, as is usually the case, the cost would have been market price; the machinery is worth that price and should be so valued. If the cost to make is less than the market, to bring the machine on the books at market would necessitate the taking of a profit of the difference between cost and market. No profit has been made, only a saving in capital investment. This confusion between profit and savings is referred to in [Chapter XIII].
In the long run, i.e., in the period covered by the life of the machine, it makes no difference in profits for that period whether the machine is carried at cost to make or at market, because its value is written off to depreciation during its life and the higher value means an increased depreciation charge. This will exactly offset during the period of the life of the machine the profit taken by bringing it onto the books in the beginning at market instead of cost. As a matter of principle, however, the point involved is of sufficient importance not to justify the practice. By cost to make is meant full cost, which includes materials used, labor applied, and a fair share of the overhead expenses. Whatever the cost to make, whether lower or higher than the identical equipment could be purchased for on the market, that represents the capital outlay and is the true basis for valuation, taking cognizance of depreciation for the elapsed period.
Expenditure for Rearrangement of Machinery
In connection with expenditures made in the rearrangement of machinery within the plant for various purposes, the question of the effect of it on the value at which the machinery is being carried requires some consideration. In [Chapter V] where an attempt was made to mark out broad boundary lines for capital and revenue expenditures, it was stated that any expenditure which produces greater earning capacity or without which a lessened earning capacity would result (assuming that all normal expenditures for maintenance and repairs are being made concurrently), may be treated as a capital expenditure or at least as a deferred charge to be spread over several periods.
In the case of depreciating assets, the practical identity of the two methods is apparent. Thus, if the expenditures for rearrangement of the machinery have either of the effects mentioned above, there is no serious objection on theoretical grounds to capitalizing them. Instead, however, of injecting such intangible values into the machinery account, it is far better, because more exact and accurate, to show them separately. Practical considerations demand that such expenditures shall not usually influence the valuation of machinery and a conservatism born of the fear of inflation requires that when treated as deferred charges, they should be written off as quickly as may be done without undue burden on the periods’ profits.