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CMA Foundation · Fundamentals of Financial and Cost Accounting · Journal and Ledger

Ravi purchased a machine for Rs 90,000 on credit from Sharma Engineers and paid Rs 5,000 in cash for its installation. What is the correct journal entry?

Machinery is debited Rs 95,000, with Sharma Engineers credited Rs 90,000 and Cash credited Rs 5,000. Installation expense is capitalised because it is necessary to make the machine ready for use, so it forms part of the asset cost.

  1. AMachinery A/c Dr. 95,000 to Sharma Engineers A/c 90,000 and Cash A/c 5,000Correct
  2. BMachinery A/c Dr. 90,000 and Installation Expenses A/c Dr. 5,000 to Sharma Engineers A/c 90,000 and Cash A/c 5,000
  3. CPurchases A/c Dr. 90,000 and Wages A/c Dr. 5,000 to Sharma Engineers A/c 95,000
  4. DMachinery A/c Dr. 95,000 to Cash A/c 95,000

Explanation

Installation cost is a capital expenditure needed to bring the machine into working condition, so it is added to the machine cost: 90,000 + 5,000 = 95,000. Credits are the supplier for 90,000 and cash for 5,000. Option B wrongly treats installation as revenue expense.

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