Rigsby Company purchased many small tools during 2010 at a total cost of $9,500. Some tools were expected to last for a few weeks, some for several months, and slme for several years. Rigsby income for 2010 will be about $5.2 million. How should Rigsby account for the small tools in order to be theoretically correct? As a practical matter, how should Rigsby account for these tools? Why?
To be theoretically correct, Rigsby should account for the small tools as expenses since they are expected to be used up within a short period of time. This is in line with the matching principle of accounting, which states that expenses should be recognized in the same period as the revenue they helped generate. Since the tools are not expected to provide any benefit beyond the year of purchase, recording them as expenses in the same year is theoretically correct.
In practice, however, Rigsby may choose to deviate from the theoretical approach for ease of accounting and practicality. Instead of expensing the entire cost of the tools in the year of purchase, they may opt to capitalize the cost and depreciate it over the expected useful life of each tool.
Capitalizing the cost means that Rigsby would treat the tools as assets on their balance sheet and record their cost as an asset value. This would allow Rigsby to spread out the expense over time and match it with the period in which the tools provide a benefit. Rigsby would depreciate the cost of the tools over their respective estimated useful lives, typically using methods like straight-line depreciation, which allocates an equal amount of the cost to each year of usefulness.
Practically, choosing to capitalize and depreciate the small tools can simplify accounting as Rigsby would not have to track and expense individual tool purchases every year. It also provides a more accurate representation of the tools' value and the associated expenses over time. This approach is more commonly followed for larger, long-term assets, allowing for consistency and easier financial analysis.