ACCA Applied Knowledge · Financial Accounting · The main elements of financial statements
Kestrel Co buys a machine on 1 January for $80,000 cash. Which of the following is the correct double entry on initial recognition of the machine at cost?
Debit Machinery and credit Cash with $80,000. The machine meets the asset definition and is recognised at cost, so the asset increases with a debit while cash decreases with a credit. Expensing it would wrongly understate assets and profit.
- ADebit Machinery $80,000; Credit Cash $80,000Correct
- BDebit Cash $80,000; Credit Machinery $80,000
- CDebit Machinery expense $80,000; Credit Cash $80,000
- DDebit Machinery $80,000; Credit Share capital $80,000
Explanation
Purchase of a non-current asset for cash increases the asset (debit) and reduces cash (credit). Expensing the cost, as in the third option, would wrongly treat a long-term resource as an expense and understate profit-related assets.
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