Accounting Principles – Equipment

” In other instances it is apparently considered as quite distinct from machinery and tools as evidenced by the separate balance sheet caption—”equipment.”

The term when used in its broadest sense would seem to include everything except buildings proper. By buildings proper is meant the bare structures. Thus, equipment would seem to include everything within the plant walls or attached to them. To enumerate the items comprised in such a broad general class would be to embrace the equipment attached to the building walls, machinery and tools, equipment used in connection with machinery, any other equipment used in connection with the manufacturing processes, office furniture and fixtures, horses, wagons, harness, automobiles, etc.

To properly classify equipment is no easy task. The task may be somewhat simplified, however, if the term is first understood as covering everything in and about a plant with the exception of land and buildings. The ideal plant would seem to consist of a manufacturing department, a department for the generation of heat, light and power, a stores department, a stable and an office. All of these departments are housed in buildings. All of these buildings will undoubtedly be equipped with apparatus essential to the occupancy of the building regardless of the purpose for which each is used. They will doubtless all be equipped with what may be termed technical appurtenances which are necessary adjuncts to the purpose for which each is used. Thus it would seem for the moment that two broad general classes might be established, namely, building equipment and technical equipment. Building equipment might properly, it would seem, be allowed to stand without further division. Technical equipment would seem to require further classification in accordance with the use to which it is put.

In attempting to go into the refinements of the classification in the case of technical equipment certain conflicts which will become apparent from time to time as this discussion proceeds, are bound to arise between building equipment and technical equipment.

Building equipment is usually understood to mean the heating system (steam pipes, radiators, etc.), the lighting system (including fixtures), elevators, the plumbing system, the water system, with its pipes, hydrants and faucets, the sprinkler system, ventilating system, fire hose and extinguishers, etc.
Since the principal activities center around the manufacturing department, such department must needs occupy an important place in this discussion. In analyzing the technical equipment of the manufacturing department our attention is directed primarily to the machinery and tools used in the process of manufacturing. We find shafting and belting, cranes and overhead trolleys, intershop tracks and cars, racks and other receptacles for holding tools, facilities for moving the product about, such as wheelbarrows, boxes, cases, bins, etc.; we find vats, shovels, picks, tongs, stools and benches and chairs for operatives. We find certain auxiliaries, such as machine shops, carpenter shops, paint shops, repair departments; we frequently find welfare accessories in the form of kitchens, dining rooms, and hospitals. In the manufacturing department we also find desks and other furniture, and mechanical devices in connection with the recording of the work, etc.

The power plant consists of the engines, boilers, generators, transformers, and is usually understood as including the transmission ramifications. There will also be found in this part of the plant, shovels, wheelbarrows and miscellaneous tools.

The stores department will contain little technical equipment except facilities for handling materials and supplies and some office furniture and equipment.

The stable equipment will depend of course upon its size and the character of the conveyances which this department comprises. They will undoubtedly be equipped with an assortment of tools and where automobiles are used with sundry spare parts. The office will consist principally of furniture supplemented by sundry mechanical appliances and devices employed in the office work.

From the above it will be seen that various classifications may be evolved. The equipment seems largely to be connected with the manufacturing department. This might also be called the operating department. It will be further evident that much of the equipment is in departments or divisions which are auxiliaries to the operating department; also that throughout the various departments furniture and appliances devoted to the recording of the work are found. In all of the above, some equipment is noticeably large and important, while in other cases it is small and unimportant. For the purpose of classification of technical equipment it would seem that there were three main divisions, namely, manufacturing equipment, stable equipment, and furniture and office equipment. In the first instance it might be divided into operating and auxiliary equipment. Miscellaneous operating equipment might be further divided into major and minor. Auxiliary equipment might be also further classified as major and minor.

In the matter of conflicts the principal difficulty is found in the cases of the water system and the lighting system. The water system with its pipes, hydrants and faucets is undoubtedly a part of the building equipment, yet in many cases its principal service will be to supply water to the operating department for use in the process of manufacture, so that it will illustrate one of the many difficulties which the classification of equipment presents. It may be true that light is served principally to the employees engaged in work upon the product so that this point frequently furnishes opportunity for a discussion. Conflict will frequently arise in connection with the power plant. Its ramifications may transmit heat, light, or power and the question arises as to whether the steam pipes, light wires, and tubing, and the shafting and belting, shall be considered a part of the major operating equipment. There will be found below a chart in which classification of the above mentioned items of equipment as well as some others not previously mentioned is attempted. In presenting it the author calls attention to the fact that he is not an engineer and makes no pretensions at submitting a classification which is proof against criticism. The whole subject is so confused in the mind of the average student that this chart is intended merely to give him a broad general idea of the contents of a plant and enable him to reason more clearly with regard to the various phases of accounting work which are related to plant equipment.

Equipment like buildings is subject to various possibilities. In studying the subject, thought should be given to it with regard to how it may be acquired, what may happen to it and how it may be disposed of. Briefly stated, it may be acquired by purchase or construction. It is subject to destruction either partially or wholly by fire and the other elements. It is usually affected more than buildings by depreciation. It requires repair and replacement frequently. It may be sold, demolished or discarded.

There are several phases of interest which arise in connection with equipment. Among these is the cost. In this connection it must first be determined whether the equipment is purchased from outsiders or constructed by the proprietor. Equipment may be purchased on a contract which provides for its installation, or the purchase price may cover merely the bare cost when an extra charge is made for its installation. If constructed by the proprietor it will contain all the elements of cost, namely, material, labor and overhead. Taking as an example a new machine purchased from an outsider to be installed free of charge, the cost will be merely that stated in the contract. If the contract price covers only the machine itself then there is a possibility that there will be charges covering the inward freight and cartage, foundations for the machine, and the further expense of installation. The cost in this case would include all these charges. If the machine were to be constructed by the proprietor, the cost would include the material of which it was composed, the labor incident to its construction, the preparation of the foundation including the material, the labor involved in the installation and a percentage of the overhead of the proprietary concern while the machine was in course of construction.

The division of equipment known as machinery and tools is frequently subdivided and sometimes classified as machines, machine tools, fixed machinery, movable machinery, hand tools, etc., and is so classified presumably for purposes of identification in individual cases where the circumstances indicate. In any event, machinery should be understood to include machine foundations and fixed appurtenances of any importance. The question of tools brings to mind certain instances wherein equipment may be considered by some concerns as supplies rather than equipment. These are cases of concerns which use large numbers of small tools which are so quickly worn out that it is not considered advisable to capitalize them. They are looked upon as supplies and are charged to expense immediately upon being purchased or as soon as issued for use. It is rather difficult to lay down any hard and fast rule in cases of this kind and the treatment will depend largely upon the circumstances in each individual case, such as the policy of the company, or the wishes of the proprietor. There are two or three checks which are sometimes placed upon the tendency of employees to treat carelessly such articles of equipment. In the case of small tools which wear out quickly the life of the tool is determined and the issue placed upon a standard basis. They are sometimes charged to the individuals who are obliged to present the worn out tools before receiving new ones. They are sometimes accounted for by inventories. In this case instead of being charged immediately to expense at time of purchase they are charged to a purchase account and the amount to be charged to expense for the period is determined by taking an inventory at the end of the period, placing upon it a value and deducting it from the cost of the tools purchased. In one concern where scientific management is in operation each employee is furnished with a supply of small metal checks bearing his number. The supply of tools in the tool room being systematically arranged, the man in charge of the tool room upon receipt from any given operative of a certain number of checks, issues the tools required and substitutes in place of the tools the various checks which he has received. Thus he is enabled to tell at a glance the employee to whom each tool is issued. The writer was interested to know how the bonus system which was in use in the plant affected the man who had charge of the tools and upon inquiry learned that it was his duty to be in his place during certain designated hours, to see that all the tools were clean, sharp and in their proper places. This was the task imposed upon this particular individual. His work was inspected periodically and if he had complied with all the requirements of his task he received an efficiency bonus.

The accounts for equipment will depend largely upon the peculiar circumstances existing in each case. The classification in the general ledger will depend upon the captions which are required for balance sheet purposes. One concern may be satisfied with an account called equipment to which will be charged machinery of every description such as building equipment, machinery and tools, other operating and auxiliary manufacturing equipment, power plant, horses, wagons, harness, automobiles, office furniture, etc. In other concerns separate accounts may be kept for these different classes of equipment, consolidating them in various combinations in the balance sheet. The accounts may also be kept separate at times for the purpose of determining the separate cost of some particular class of equipment or for controlling underlying records containing the details. It should be also borne in mind that in some instances the accounts on the general ledger will be kept with the various buildings in order to show in connection therewith the cost of the respective buildings, including their equipment. Detailed records of equipment are sometimes kept for the purpose of classifying it for depreciation purposes. In such cases the equipment is classified in accordance with its life. The matter of depreciation of equipment will be discussed under that general topic later on.