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CMA Foundation · Fundamentals of Financial and Cost Accounting · Financial Statements of Sole Proprietorship

Ramesh Traders, a sole proprietorship, paid Rs 40,000 to repair a machine so that it continues to work at its normal capacity. How should this payment be treated in the final accounts?

The Rs 40,000 is revenue expenditure and is charged to the Profit and Loss Account, because repairs only maintain the machine's normal working capacity and create no new asset or lasting improvement in earning capacity.

  1. ADebited to the Machinery account as a capital expenditure
  2. BDebited to the Trading or Profit and Loss Account as revenue expenditureCorrect
  3. CShown as a deferred revenue asset in the Balance Sheet
  4. DDebited to the Proprietor's Capital account as drawings

Explanation

Ordinary repairs only maintain the existing earning capacity of the machine and do not add a lasting benefit. They are therefore revenue expenditure and are charged to the Profit and Loss Account. Capitalising them would overstate assets and profit.

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