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CSEET · Fundamentals of Accounting · Accounting Process

Ramesh Traders purchased a computer for use in the office and, on the same day, charged its full cost to the Profit and Loss Account as an expense. Which accounting idea is mainly disregarded by this treatment?

The treatment ignores the distinction between capital and revenue expenditure. A computer benefits the business over several years, so its cost should be capitalised as an asset and depreciated, not written off entirely as an expense in the year of purchase.

  1. ADistinction between capital and revenue expenditureCorrect
  2. BMoney measurement concept
  3. CBusiness entity concept
  4. DDual aspect concept

Explanation

A computer used for several years gives long-term benefit, so it is capital expenditure and must be shown as an asset and depreciated. Charging the whole cost to the Profit and Loss Account treats it as revenue expenditure. This understates profit and omits the asset. Dual aspect is still satisfied because the debit and credit are both recorded.

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