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CMA Foundation · Fundamentals of Financial and Cost Accounting · Adjustment Entries and Rectification of Errors

Repairs to a machine costing ₹6,000 were debited to the Machinery account. Which statement is correct about the effect of this error?

Profit and assets are both overstated by ₹6,000. Repairs are revenue expenditure, but debiting them to the Machinery account capitalises them, so expenses are understated. The trial balance still agrees, since this is an error of principle.

  1. AProfit is understated and assets are understated
  2. BProfit is overstated and assets are overstatedCorrect
  3. CProfit is overstated and the trial balance disagrees
  4. DProfit is unaffected because the trial balance agrees

Explanation

Repairs are revenue expenditure and should be debited to Repairs account. Debiting Machinery capitalises the expense, so expenses are understated and profit is overstated by ₹6,000, and the machinery asset is overstated by the same amount. The trial balance still agrees because it is an error of principle.

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