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CMA Foundation · Fundamentals of Financial and Cost Accounting · Financial Statements of Sole Proprietorship

Gupta Enterprises wrongly debited Rs 50,000 spent on extending its factory building to Repairs account instead of Building account. Ignoring depreciation, what is the effect on the year's profit and on the Balance Sheet?

Profit is understated by Rs 50,000 and assets are understated by Rs 50,000, because capital expenditure on extension was wrongly charged as a revenue expense, reducing profit and leaving the Building lower than it should be.

  1. AProfit understated by Rs 50,000 and assets understated by Rs 50,000Correct
  2. BProfit overstated by Rs 50,000 and assets overstated by Rs 50,000
  3. CProfit understated by Rs 50,000 and liabilities overstated by Rs 50,000
  4. DProfit is unaffected and assets are understated by Rs 50,000

Explanation

Extension is capital expenditure and should increase Building. Debiting Repairs inflated expenses by Rs 50,000, so profit is understated by that amount. The Building is also shown lower by Rs 50,000, so assets are understated. Profit being overstated would be the opposite error.

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