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

Ravi Textiles, a sole proprietorship, paid Rs 40,000 as carriage inwards on purchase of a new machine and Rs 6,000 as routine repairs to an existing machine. How should these two items be treated in the final accounts?

Carriage on a new machine is capital expenditure and is added to the machine's cost, because it is needed to bring the asset into use. Routine repairs maintain existing capacity and are revenue expenditure, so they are debited to the Profit and Loss Account.

  1. ABoth debited to Profit and Loss Account
  2. BCarriage added to cost of machine; repairs debited to Profit and Loss AccountCorrect
  3. CCarriage debited to Trading Account; repairs added to cost of machine
  4. DBoth added to the cost of machine in the Balance Sheet

Explanation

Carriage paid to bring a fixed asset to its place of use is part of its cost and so is capitalised. Routine repairs only maintain earning capacity and are revenue expenditure charged to Profit and Loss Account. Treating both as revenue or both as capital would misstate profit and assets.

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