CA Foundation · Accounting · Theoretical Framework

Bhatia Traders purchased machinery for ₹5,00,000 and spreads its cost over 5 years, although the business has no plan to sell the machine. Which concept primarily justifies this treatment of the machine as an asset used over several years rather than charging the whole cost in year one?

The going concern concept justifies it. Since the business is assumed to continue for the foreseeable future, the machine will give benefits over several years, so its cost is spread across those years instead of being expensed entirely in the year of purchase.

AGoing concern conceptCorrect
BCash basis of accounting
CConservatism
DMateriality

Explanation

Under the going concern assumption the business is expected to continue operating for the foreseeable future, so the machine will be used over its life and its cost is spread over those years. Conservatism would favour a faster write-off but is not the basis for allocation. Cash basis would charge the full amount when paid, which is not followed here.

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Bhatia Traders purchased machinery for ₹5,00,000 and spreads its cost over 5 years, although the business has no plan to sell the machine. Which concept primarily justifies this treatment of the machine as an asset used over several years rather than charging the whole cost in year one?

Explanation

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