Which of the following is an example of capital expenditure?
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A. Purchasing a new computer for the office Capital expenditure is spent on acquiring or improving long-term assets, such as equipment or buildings. The other options are examples of revenue expenditure, which covers day-to-day running costs.
How should a business account for capital expenditure?
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C. By increasing an asset account and crediting cash Capital expenditure is recorded by increasing the relevant asset account and crediting the cash account, as it represents an investment in the business's long-term assets.
What is the distinction between capital receipts and revenue receipts?
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A. Capital receipts are from selling long-term assets, while revenue receipts are from day-to-day operations Capital receipts come from activities like selling fixed assets, while revenue receipts are from regular business operations, such as sales of goods or services.
How should a business account for a capital receipt?
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C. By decreasing an asset account and debiting cash A capital receipt, such as the sale of a fixed asset, is recorded by decreasing the asset account and debiting the cash account, with any profit or loss going to a capital reserve account.
If a business incorrectly treats capital expenditure as revenue expenditure, what effect will this have on profit?
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A. Profit will be overstated Incorrectly treating capital expenditure as revenue expenditure will overstate expenses in the profit and loss account, leading to an understatement of profit. The asset will also be understated in the balance sheet.
If a business incorrectly treats a capital receipt as a revenue receipt, what effect will this have on profit?
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A. Profit will be overstated Incorrectly treating a capital receipt as a revenue receipt will overstate income in the profit and loss account, leading to an overstatement of profit. The asset will also be understated in the balance sheet.
What is the effect on asset valuations if a business incorrectly treats capital expenditure as revenue expenditure?
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B. Assets will be understated Incorrectly treating capital expenditure as revenue expenditure means the cost is expensed rather than capitalised, leading to an understatement of assets in the balance sheet.
What is the effect on asset valuations if a business incorrectly treats a capital receipt as a revenue receipt?
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B. Assets will be understated Incorrectly treating a capital receipt as a revenue receipt means the proceeds are recorded as income rather than reducing the asset, leading to an understatement of assets in the balance sheet.
A business purchases a delivery van for £20,000. How should this transaction be recorded in the accounting records?
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A. Debit Van account £20,000; Credit Cash account £20,000 The purchase of a delivery van is capital expenditure, so it should be recorded by debiting the Van account (an asset) and crediting the Cash account.
A business sells an old machine for £5,000. The machine originally cost £10,000 and had accumulated depreciation of £6,000. How should this transaction be recorded in the accounting records?
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C. Debit Cash account £5,000; Credit Machine account £10,000; Debit Accumulated Depreciation account £6,000; Credit Profit on Sale of Machine account £1,000 The sale of the machine is a capital receipt. The entry records the removal of the asset, the recognition of accumulated depreciation, and the profit or loss on sale.
A business incorrectly expensed £3,000 for the purchase of office furniture instead of capitalising it. What journal entry is needed to correct this error?
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A. Debit Office Furniture account £3,000; Credit Profit and Loss account £3,000 To correct the error, the £3,000 should be capitalised by debiting the Office Furniture account and crediting the Profit and Loss account to reverse the incorrect expensing.
A business sold a piece of equipment for £4,000 but incorrectly recorded it as revenue. The equipment originally cost £5,000. What journal entry is needed to correct this error?
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B. Debit Cash account £4,000; Credit Equipment account £5,000; Debit Profit on Sale of Equipment account £1,000; Credit Revenue account £4,000 To correct the error, the entry should reverse the incorrect revenue recognition, remove the equipment from the asset account, and record the profit or loss on sale.
What is the effect on profit if a business incorrectly treats revenue expenditure as capital expenditure?
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A. Profit will be overstated Incorrectly treating revenue expenditure as capital expenditure means the cost is not expensed in the profit and loss account, leading to an overstatement of profit. The asset will also be overstated in the balance sheet.
What is the effect on asset valuations if a business incorrectly treats revenue receipts as capital receipts?
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A. Assets will be overstated Incorrectly treating revenue receipts as capital receipts means the income is used to increase an asset account, leading to an overstatement of assets in the balance sheet.
A business purchased office supplies for £200. How should this transaction be recorded in the accounting records?
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A. Debit Office Supplies account £200; Credit Cash account £200 The purchase of office supplies is revenue expenditure, so it should be recorded by debiting the Office Supplies account (an expense) and crediting the Cash account.