ACCA Applied Knowledge · Financial Accounting · General ledger accounts and journal entries
Hartley Ltd paid $12,000 to install a new air-conditioning system in its factory, but the accounts clerk debited the amount to the repairs and maintenance expense account. What is the effect of this error on the financial statements for the year?
Profit is understated and non-current assets are understated. The installation is capital expenditure that should be added to assets, but charging it to repairs expense reduces profit and leaves the asset out of the statement of financial position.
- AProfit understated and non-current assets understatedCorrect
- BProfit overstated and non-current assets overstated
- CProfit understated and non-current assets overstated
- DProfit overstated and non-current assets understated
Explanation
Installing a new system is capital expenditure and should be debited to non-current assets. Debiting it to repairs expense wrongly reduces profit by $12,000, so profit is understated, and the asset is omitted, so non-current assets are understated. Overstatement options reverse the effect.
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