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CS Professional · Internal and Forensic Audit · Internal Audit of Specific Functions

Narmada Textiles Ltd. spent ₹4,00,000 on routine repainting and minor servicing of a loom, and separately ₹6,00,000 on an upgrade that increased the loom's output capacity. In the internal auditor's review of capital versus revenue expenditure, what is the correct treatment?

Charge the ₹4,00,000 repainting and servicing to profit and loss, and capitalise the ₹6,00,000 upgrade. Routine maintenance only preserves the existing performance, whereas the upgrade increases capacity and creates future economic benefits, so it qualifies as capital expenditure.

  1. ACapitalise both amounts as they relate to the loom
  2. BCharge both amounts to the statement of profit and loss
  3. CCharge ₹4,00,000 to profit and loss and capitalise ₹6,00,000Correct
  4. DCapitalise ₹4,00,000 and charge ₹6,00,000 to profit and loss

Explanation

Routine repairs and maintenance only keep the asset in working condition and are revenue expenses. The upgrade raises capacity and gives future economic benefit beyond the original standard, so it is capital. Capitalising both would overstate assets and profit by ₹4,00,000.

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