Question

Rs.10,000 paid in cash for repair of a newly purchased old machine were debited to repairs 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

Answer: (D)

None of these

When cash is paid for repairs of newly purchased old machine it is a capital expenditure and is debited to machinery account as it enhances the efficiency of the machinery as it has to be used for a longer period of time.

When this amount of repair is debited to repairs account, this is known as error of principle as capital expenditure is treated as revenue expenditure.

This error will not affect the trial balance because expense has been rightly debited though to the wrong account but the net effect remains the same, so the trial balance will tally.

This error surely affects the profit because it is a capital expenditure which is added to the value of the machinery, while here it has been written as revenue exoenditure which is deducted from the profit of the year. This in turn reduces the profit for the year.