Hi…i’ve just started learning this software and am starting my own business. My situation is this…i purchase pre-made patterns which i then use to create finished products…these patterns are not used up in the production of finished items but the cost of each pattern needs to be allocated to each finished product…i can use the same pattern over & over again to create many finished products…do i treat the patterns as fixed assets? or as inventory items that never get used up? TIA
PS sorry if this has been asked before but i couldn’t find a solution after trawling the forum for many many hours
Definitely not inventory, which consists of goods held for sale or consumed in production. Whether to treat them as fixed assets depends on their value. Most jurisdictions impose cost and life thresholds. In other words, it must be worth more than XXXX and last longer than a year, as an example. Otherwise, a pattern is just a tool or supply and gets treated as an expense.
This is independent of what accounting system you use.
Why do you say the cost of each pattern needs to be allocated to each finished product? A carpenter does not allocate the cost of a hammer to a house. You can certainly consider the cost of patterns when you set you prices on finished goods. But it would be unusual to specifically allocate the costs, since the patterns are not used up. That cost can only be allocated once.
Using the concept of a hammer - it is an asset in that you use it for more than one year, but because its worth less than £100, you treat it as an expense as the whole point of fixed assets is to apportion the cost of the capital purchase over several years instead of recording a huge loss in one year! Also for depreciation purposes, you don’t bother to depreciate a hammer.
Put your patterns in an expense account called tools or something like that and be done with it. A fixed asset would be something worth over a hundred pounds and has a fixed lifespan like 5 years or 10 years and you want to apportion the cost over a set number of years. For things like patterns, its not in the same kind of category. Assuming the patterns are under a certain value obviously. If they are worth 5 grand, then yes they are fixed assets.
I have over $2000 AUD of patterns that i mix n match as templates for my own designs…not even close as being the same as a hammer…so can we pls stop using that as an example
The hammer was just an example, @Rhiannon_Murphy, to illustrate a point. And the example was very close: a tool that is used repeatedly and wears out slowly, if at all.
If your patterns are valued in Australian dollars, at least five things will matter in determining whether to expense them or capitalize them (meaning to enter as fixed assets and depreciate over time):
The capitalization threshold set by the Australian tax authorities
The expected (or statutory if there is one) life of the patterns compared to the lifetime thresholds set by the authorities
The cost of individual patterns (not the whole group of them)
Whether local law allows any exemptions from normal capitalization standards/practices, such as for small businesses, to ease accounting burdens (some jurisdictions do, some don’t)
Whether local law requires capitalization of certain items, regardless of their value or lifetime (this is not likely for a pattern)
Continuing with the example you don’t like, a carpenter may have $5,000 invested in tools in a jurisdiction where the capitalization threshold is $500 and the lifetime threshold is one year. Every tool is expected to last 5 years or more, but no tool individually cost more than $300. The carpenter has no fixed assets. Every time a tool was purchased, it was expensed in the current year.
Currently in Australia (expiring Jun 30, 2017) - “New laws have passed that allow small businesses to claim an increased instant write off for assets – provided each depreciable asset costs less than $20,000. This will temporarily replace the previous instant asset write-off threshold of $1,000.”
Having said that, there is no compulsion to do that write off in your accounts, you may just take advantage of it for tax return purposes only.
With regards to the patterns, do they retain a value - could they be on sold in the future to someone else.
If they don’t retain a worth while value then they aren’t fixed assets and should be expensed.
Then there are asset values and there are asset values - going back to the “poor” carpenter.
He may purchase $10,000 in tools and expensed them all as no one tool is worth more then the $1,000.
But if his work vehicle is stolen and not recovered then for insurance purposes the tools are still worth $10,000 as they need replacing.
That is my concern Brucanna…i plan to keep the patterns (which are old i mean really old and no longer available or even being reproduced anymore) in a fire proof safe but how do i show on my books that i have these (what i call) assets to my business…they are my reference templates for creating my own unique designs…i create copies to be used for making things and that’s just recorded as an expense of buying cardboard/film/sharpies/etc…but these patterns make my business what it is…it’s these patterns that make me stand out from similar small businesses…how do i show that on paper? and god forbid if the patterns are destroyed…they are irreplacable…then there’s the designs i create myself which are not sold or used by anyone else…they are what every finished product i sell is based on…without them…there is no business…so how can they not be assets?
Ok, so you have a conflict between fixed assets which have a value and the accounting for fixed assets.
I would put the purchase price of the original patterns into Fixed Assets (plus insure them).
Then you have the choice of depreciating them or not. The bonus of the depreciation is the tax deduction.
Depreciating them doesn’t mean that they are removed from the books, they are just carried forward with zero value.
Going back to our “poor” carpenter, they may expense (write off) their $10,000 worth of tools, but on retirement they could all be sold at a garage sale for $2,000 - so a recovery of the written off value.
A similar position would apply to your original patterns if they were depreciated.
Your designs in themselves, are intellectual property of your business but to value them is a variable.
If you created master “moulds” of your designs then the cost of those master “moulds” could be capitalised.
But the value of your library of designs, while significant to the success of your business, don’t have an accounting value, but a potential market value if they were sold.
As I said earlier “there are asset values and there are asset values” but not all are accounting values.
A further point, the designs that you create are owned by you - the individual, which you lend to the business to create products. However, if the business actually paid you to create the designs, then they would be owned and be assets of the business.
Thank you Brucanna…i will set up a fixed asset account for patterns…but i won’t depreciate them as individually i can write them off for being under the threshold amount (is that correct?)…in regards to my own designs…i create a template of my design to use for future products…how do i “capitalise” that? technically the physical template is just cardboard or film that i’ve drawn out with sharpies which i just put down as stationery expense…where would i even start to value my own designs…or am i just getting too far ahead of myself?
If you are going set up a fixed assets account for the patterns, then you would depreciate them 100%.
To write them off means that you are directly expensing them, bypassing them being classified as fixed assets.
I would suggest - yes. Whilst your own designs are “valuable” to the business and its success, however, from an accounting perspective their creation doesn’t create an accounting fixed asset transaction.
Good practice requires each individual item to be a fixed asset rather than to consider a group of items as an asset. This is because you might have to dispose of them individually as they become unusable over time. And if accelerated depreciation is allowable, they must still be depreciated individually.
You may also have a problem establishing their acquisition cost, since you said they were old. If you purchased them before you started your business, you have no obvious transaction to point to as acquisition cost. In that case, you might have to consider them as contributions in kind, involving an equity account. The availability of the accelerated depreciation exception might not then be available. A local accountant can help you with this, but I would predict the advice would be not to capitalize the patterns at all.
If accelerated depreciation is available, why bother with fixed assets in the first place? The net effect will be an expense, because depreciation allowable in the current year is an expense.
So the fixed assets register of the business has their existence recorded. Just because the accounting (due to taxation law) has them at zero value, doesn’t actual mean that the fixed assets are worthless or not worth recording. There are potential future events (beyond the accounting) which may require proof of their existence - insurance claims being one.
You make several valid points, all of which I recognized in advance. My broader perspective, which perhaps I didn’t make clear enough, was that @Rhiannon_Murphy seems quite determined to treat these patterns as fixed assets, despite there being little in the way of normal justification for doing so. So I was trying to point out that financially the end result would be the same, comparing accelerated depreciation of fixed assets and outright expensing. In other words, there would be a bunch of work for questionable benefit.
There are, for example, other methods of documenting the patterns for insurance purposes. (Photographs and/or appraisals would be more useful than accounting entries.) And I am fully in agreement with your earlier explanations of the difference between value to a business of intellectual (or even physical) property and the way it is reflected in accounting records.
Ironically, through all this discussion, the two things @Rhiannon_Murphy has not shared are the initial cost of the patterns and what they’re patterns for. All we know for sure is that they aren’t hammers.
I think the actual cost and their usage is immaterial - the original question is one of appropriate recording and/or recognition of various business facets - which can be beyond just the pure financial / taxation justification. The clarity as to ownership and the inter-relational rights associated to these can all be assisted by proper accounted documentation.
Yes, the aggregate cost was shared, but not the cost of an individual pattern.
No dispute about anything you have said. I’m just making the point that the proper accounting treatment can depend on circumstances of both acquisition and use.
@Rhiannon_Murphy seems to be trying to put intellectual property into fixed assets. This can be done with “purchased IP” which would fit with standard accounting principles however internally generated would be treated as normal expense at that point of time. Here is a link from WIPO (World Intellectual Property Organization) that might explain it better; http://www.wipo.int/sme/en/documents/ip_accounting_fulltext.html.
I deal with IP only when trying to establish a fair market value for a company, primarily for the sale of the business or for investors and shareholders. It is not an exact science. For example a furniture company would have multiple types of chairs, chair A might be sold 50 times, chair B sold 20 times, chair C was sold 2 times. The design for chair A would have a higher value than chair C, etc. This is a very simple example and many other factors come into play.
You’ve all successfully confused me…sarcasm aside…u say one thing…then i ask for clarification then i get “no don’t do that”…thanks for wasting my time
@Tut you don’t have a very nice attitude for someone who is meant to help ppl…your sarcasm is unnecessary and rather than actually provide real assistance you just want to nitpick everything and comment on how badly the poster explains things…
now how do i close this post so i stop getting notifications from you…
