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CMA Foundation · Fundamentals of Financial and Cost Accounting · Trial Balance

A trial balance agrees. Later it is found that Rs 4,000 paid for repairs to a machine was debited to the machinery account instead of the repairs account. Which statement is correct?

It is an error of principle: revenue expenditure was treated as capital. The trial balance still agrees because the debit simply went to a wrong account. Repairs expense is understated by Rs 4,000, so profit is overstated by Rs 4,000 and machinery is overstated.

  1. AIt is an error of principle; trial balance agrees but profit is overstated by Rs 4,000Correct
  2. BIt is a compensating error; trial balance agrees and profit is unaffected
  3. CIt is an error of commission; trial balance disagrees by Rs 4,000
  4. DIt is an error of principle; trial balance agrees but profit is understated by Rs 4,000

Explanation

Treating a revenue expense as a capital item is an error of principle. Both accounts are debits, with the cash credit unchanged, so totals still agree. Repairs expense is understated by Rs 4,000, so profit is overstated by Rs 4,000 and the asset is overstated.

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