ACCA Applied Knowledge · Financial Accounting · The main elements of financial statements
Which of the following transactions of a company would be recognised as an expense under the Conceptual Framework definition?
The machine impairment is an expense because it reduces an asset and thereby reduces equity. Dividends are distributions to owners and excluded, while buying inventory and repaying loan principal do not reduce equity.
- APayment of a dividend to ordinary shareholders
- BPurchase of inventory for cash, held at the year end
- CRepayment of a bank loan principal
- DImpairment of a machine, reducing its carrying amountCorrect
Explanation
An expense is a decrease in assets or increase in liabilities that decreases equity, excluding distributions to equity holders. An impairment reduces an asset and equity, so it is an expense. Dividends are distributions and excluded; inventory purchase and loan repayment only swap assets or reduce a liability with an asset, with no effect on equity.
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