Let me begin by giving a small explanation of what loose tools are before we dive into their accounting treatment. Loose tools are assets that are used in various steps of the production process and therefore are vital for the conversion of raw materials into finished goods. They are considered as cRead more
Let me begin by giving a small explanation of what loose tools are before we dive into their accounting treatment.
Loose tools are assets that are used in various steps of the production process and therefore are vital for the conversion of raw materials into finished goods. They are considered as current assets of the business as their useful life is limited. They have a small monetary value (cost-efficient) and high turnover. Examples of loose tools include screwdrivers, hammers, etc.
One may say loose tools like screwdrivers and hammers can be used for more than one year and therefore should be classified as non-current assets. But unlike fixed assets, these loose tools have a high probability of being misplaced or lost. Hence they are classified as current assets.
Since loose tools are treated as an asset for the business, they are shown as a debit balance in the trial balance.
The cost of loose tools consumed for the year will be shown on the debit side of the Profit & Loss A/c as an expense. In the balance sheet, loose tools are shown on the Assets side under the head Current Assets and sub-head Inventories. Since they aid the production process, loose tools are shown as a part of the inventory of the business.
Let us take an example,
XYZ Ltd. at the beginning of the year had loose tools worth 5,000. During the year they purchased loose tools worth 500. At the end of the year, the company valued its loose tools at 4,500.
Now let us find the cost of loose tools consumed. The formula for finding the cost of loose tools consumed is as follows:
| Cost of loose tools consumed = | Opening inventory of loose tools + Purchases of loose tools – Closing inventory of loose tools |
Cost of loose tools consumed = 5,000 + 500 – 4,500 = 1,000
So, the cost of loose tools consumed (1000) will be shown on the debit side of the P&L A/c as follows:
The closing inventory of loose tools worth 4,500 will be shown on the assets side of the balance sheet under the head current assets and sub-head inventory in the following manner:
One thing to remember here is there is an exception to loose tools. While calculating liquidity ratios like the Current ratio, Quick ratio, etc. loose tools are excluded from current assets. The reason for this is loose tools cannot be easily converted into cash i.e. they are less liquid. The purpose of calculating the current ratio is to check the liquidity of a company. Including loose tools (which cannot be easily converted into cash) in current assets defeats the purpose of calculating the ratio.
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Yes, Accounts Payable can have a Debit balance. Accounts payable is a liability and thus, has a credit balance but can have a debit balance in case the creditor is overpaid or when there is purchase return (for already-paid goods) ACCOUNTS PAYABLE Accounts payable refers to all short-term liaRead more
Yes, Accounts Payable can have a Debit balance. Accounts payable is a liability and thus, has a credit balance but can have a debit balance in case the creditor is overpaid or when there is purchase return (for already-paid goods)
ACCOUNTS PAYABLE
Accounts payable refers to all short-term liabilities of the business that are to be paid. These are usually paid within a duration of 90 days. It includes both Trade payable (goods and services purchased on credit) as well as expenses payable (used but payment not made yet) like rent payable, electricity bill, etc.
Businesses cannot make every payment on the spot. There can be cases when the business is facing a shortage of funds, can have funds but doesn’t have enough cash (or liquid funds) to make payment or simply doesn’t want to make payment on the spot to reduce its capital requirement.
So, like us businessmen also purchase goods on credit or use services for which payment is to be made soon. All these are liabilities for the business.
However, they must be related to the business to be considered as accounts payable.
DEBIT BALANCE OF ACCOUNTS PAYABLEÂ
Debit balance of accounts payable means money owed by others. There is Debit balance when
OVERPAYMENT is made to the creditors or the supplier. It happens when the wrong amount is paid or payment is made twice for the same transaction.
Suppose you need to pay $10,000 as rent within 30 days. After 25 days you mistakenly made a payment of $12,000.
In this case,
PURCHASE RETURNÂ of already paid goods also result in debit balance of Accounts Payable.
Suppose you bought goods worth $50,000 from Mr A on credit and paid for the same. Later, you returned all the goods because they were defective. Now, there will be Debit balance of Accounts Payable till there is a full refund of $50,000 by Mr A.
How is Accounts Payable Treated Normally?
Accounts Payable are the current liabilities of the firm and are shown under the head Current Liabilities in the Balance Sheet. Its liability, thus has a credit balance which represents the amount owed by the firm to others. It is credited when increases and debited when decreases.
For example – Suppose you purchased goods worth $30,000 and agreed to pay after 30 days. So, Accounts payable will be credited by $30,000 and purchases will be debited by $30,000.
Purchases A/c – $30,000 (debit)
To Accounts Payable A/c – $30,000
After 30 days payment is made in cash, which means the liability decreased. So, Accounts Payable A/c will be debited.
Accounts Payable A/c – $30,00
To Cash – $30,000
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