A machine was purchased and after sometime it met with an accident. Am...
Introduction:
When a machine is purchased and later undergoes repairs, it is important to determine whether the expense incurred on repairs can be considered a capital expenditure. Capital expenditures are costs incurred to acquire or improve a long-term asset, such as machinery, buildings, or equipment. On the other hand, revenue expenditures are costs incurred in the day-to-day operations of a business and are typically expensed immediately.
Explanation:
In order to determine if the expense on repairs is a capital expenditure, we need to consider the following factors:
1. Significance of the repair: If the repair is significant and improves the machine's performance, extends its useful life, or increases its production capacity, it is likely to be considered a capital expenditure. On the other hand, minor repairs and maintenance expenses are typically treated as revenue expenditures.
2. Impact on future benefits: If the repair expense is expected to generate future economic benefits beyond the current accounting period, it is more likely to be classified as a capital expenditure. This is because capital expenditures are capitalized and recognized as assets on the balance sheet, and their costs are allocated over their useful life through depreciation.
3. Materiality: The materiality of the repair expense also plays a role in determining its classification. If the cost of the repair is significant in relation to the cost of the machine or the business's overall financial position, it is more likely to be considered a capital expenditure.
4. Accounting policies: The accounting policies of the business also come into play. Different businesses may have different policies regarding the classification of repair expenses. It is important to follow the applicable accounting standards and guidelines to ensure consistency and accuracy in financial reporting.
Conclusion:
Based on the factors mentioned above, if the repair expense is significant, improves the machine's performance or extends its useful life, and is expected to generate future economic benefits, it is likely to be classified as a capital expenditure. However, it is important to consider the specific circumstances and accounting policies of the business before making a final determination.
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