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

Sharma & Sons incurred Rs 60,000 on an advertisement campaign for a regular product, the benefit of which is expected to be consumed within the current year. Which statement is correct?

It is revenue expenditure charged fully to the current year's Profit and Loss Account, because the advertising benefit is used up within the year and does not create an enduring asset; the size of the amount does not change its nature.

  1. AIt is capital expenditure because it is a large amount
  2. BIt is capital expenditure because it will increase future sales
  3. CIt is revenue expenditure to be charged fully to the current year's Profit and Loss AccountCorrect
  4. DIt is capital receipt and credited to the Capital account

Explanation

The benefit of the advertisement is exhausted within the accounting year, so the cost is revenue expenditure. Size of the amount alone does not make an item capital. It is charged wholly to the current Profit and Loss Account.

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