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CMA Intermediate · Financial Accounting · Accounting Fundamentals

Iyer Stores purchased a computer for Rs 45,000 and immediately charged it fully to Repairs Expense, as it considered the amount small. The proprietor's own policy treats items below Rs 5,000 as revenue. Under the matching concept, what is the correct treatment?

It should be capitalised and depreciated over its useful life. The computer benefits several years and exceeds the Rs 5,000 threshold, so matching requires its cost to be spread as depreciation rather than charged fully as a current-year expense.

  1. ACapitalise it as an asset and depreciate it over its useful life, since the benefit extends over several yearsCorrect
  2. BKeep it as revenue expense because the policy states so
  3. CCharge it to Drawings as a personal asset
  4. DShow it as a deferred revenue expense only if profit is high

Explanation

The computer gives benefit over several years and Rs 45,000 exceeds the Rs 5,000 threshold, so it is capital expenditure. Matching requires spreading its cost through depreciation over the periods benefited. Expensing it fully would understate current profit and omit an asset.

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