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CMA Foundation · Fundamentals of Financial and Cost Accounting · Capital and Revenue Transactions

Sharma Traders paid Rs 40,000 to buy a delivery van and Rs 3,000 as one month's petrol expense for the same van. How should these two payments be classified?

The van purchase of Rs 40,000 is capital expenditure because it creates a long-lasting asset, while the Rs 3,000 petrol cost is revenue expenditure because it is used up in day-to-day operations within the year and is charged to the profit and loss account.

  1. ABoth as capital expenditure
  2. BBoth as revenue expenditure
  3. CRs 40,000 as capital expenditure and Rs 3,000 as revenue expenditureCorrect
  4. DRs 40,000 as revenue expenditure and Rs 3,000 as capital expenditure

Explanation

Purchase of the van gives benefit over several years and creates a fixed asset, so it is capital expenditure. Petrol is consumed in running the business during the year and is revenue expenditure. Treating both as capital would overstate assets and profit.

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