CA Foundation · Accounting · Theoretical Framework

Mehta Traders records the purchase of a delivery van for its own use as a fixed asset and not as an expense of the year, even though it was paid for in full during the year. Which accounting concept best supports this treatment?

The going concern concept supports capitalising the van. Since the business is expected to continue operating, an asset that benefits many years is shown on the balance sheet and its cost is allocated over its useful life through depreciation, rather than charged wholly in the purchase year.

AGoing concern conceptCorrect
BCash basis of accounting
CRevenue recognition concept
DMateriality only

Explanation

Under the going concern assumption, the business is expected to continue for the foreseeable future, so a van that will serve several years is treated as an asset and its cost is spread over its useful life through depreciation. Writing it off fully in the year of purchase would ignore this assumption. Cash basis is wrong because it would treat payment as the expense.

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Mehta Traders records the purchase of a delivery van for its own use as a fixed asset and not as an expense of the year, even though it was paid for in full during the year. Which accounting concept best supports this treatment?

Explanation

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