Question

Rs.10,000 paid in cash for installation of a new machine were debited to Installation Expenses Account. This error:

• A. is an error of omission
• B. will affect the trial balance
• C. Will not affect the profit
• D. None of these

Answer 1

The correct option is D None of these

Installation expense on the purchase of new machinery is added to the value of the machinery. Any expense incurred on machinery at the time of purchase to get it in place and ready for use is capital expenditure and added to the value of the machinery.

When installation expense is debited to installation expense account, this is known as error of principle. Here no distinction is made between capital and revenue items. Here capital expenditure is debited as revenue expenditure. This error does not affects the agreement of the trial balance as the correct amount is debited only the account is wrong, the net effect is same.

This error affects the profit of the year, as revenue expenditure is deducted from the profit and loss account, while capital expenditure is transferred to the balance sheet.