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CA Intermediate · Advanced Accounting · Framework for Preparation and Presentation of Financial Statements

Veda Traders Ltd. acquired a machine for ₹8,00,000 and used it for production. The management says that the machine will be used for 10 years and depreciation is charged on a systematic basis over this period, rather than being charged fully in the year of purchase. Which accounting assumption or principle in the Framework best explains why the cost is spread over the machine's useful life?

The accrual basis explains it. Costs are recognised as expenses in the periods in which the asset gives benefits, so the machine cost is spread over its useful life. A cash basis would instead charge the whole payment in the year it was paid.

  1. AAccrual basis, as the cost is matched with the periods in which the machine yields benefitsCorrect
  2. BCash basis, as the payment was made in the year of purchase
  3. CMateriality, as the machine is a large item
  4. DPrudence, as expenses must always be recognised earlier than income

Explanation

Under the accrual basis, costs are recognised when incurred and matched with the revenue or benefits of the periods to which they relate. Spreading the machine cost over its 10-year life matches cost with benefit. Cash basis would charge the whole ₹8,00,000 in the year of payment.

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