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Capital Expenditure. These expenses are incurred for acquiring fixed assets such as building, plant machinery, furniture and vehicles etc. Assets acquired are not meant for sales. These are purchased to retain and use in the business. This expenditure increases profit earning capacity of the business. It is causally incurred and does not have regularity in its payment.

 

The important feature of this expenditure from accounting point is that we debit assets account which have been acquired not expenses account. In case, expenses account are debited it will be an error of principle and require to be rectified. Accounting treatment of capital expenditure is illustrated as under :

 

Building account will be debited in the following cases :

 

  1. Purchases of building.
  2. Purchases of raw material for the construction of building.
  3. Payment of wages for construction of building.
  4. Payment of wages for addition to building.
  5. Payment of wages for extension of building.
  6. Payment of wages for erection of shed or canteen or verandah in the building.
  7. Repair to second hand building.
  8. Payment for registration fee or other expenses while purchasing building.

 

In the above cases, if wages account or certain other expenses accounts are debited instead of building account, it will be an error of principle and will require to be rectified.

 

Illustration 8. Rectify the following errors:

 

1. Purchases of building was passed through purchases book amounting to $. 80,000.

2. Wages paid for construction of building was debited to wages account with $ 20,000.

3. Expenses of errrection of shed was debited to trade expenses account amounting to $ 3,000.

4. Wages paid for extension of building was debited to wages account amounting to $7,000.

5. Repair to second hand building was debited to repairs account with $. 18,000.

6. Materials purchased for construction of building was debited to purchases account amounting to $. 28,000.

7. Expenses for construction of new canteen were debited to miscellaneous expenses account with $1,600.

 

Solution.                                           Rectified Journal Entries

Amount

Date                            Particulars                              L.F.

Debit                           Credit

$                                  $

  1.  Building A/c                                      Dr.                              80,000

To Purchases A/c                                                                                                        80,000

(Being purchase of building wrongly debited to purchase account, now rectified)

 

  1.  Building A/c                                      Dr.                               20,000

ToWages A/c                                                                                                              20.000

(Being wages paid for construction of building was wrongly debited

to wages account, now rectified)

 

3.  Building A/c                                         Dr.                                3,000

To Trade expenses A/c                                                                                                 3,000

(Being expenses for erection of shed was wrongly debited to trade

expenses account, now rectified)

 

4.         Building A/c                                       Dr.                              7.000

ToWages A/c                                                                                                             7,000

(Being payment of wages for extension of building was wrongly

debited to wages account, now rectified)

 

5.     Building A/c                                          Dr.                             18,000

To Repairs A/c                                                                                                                18,000

(Being repairs to second hand building was wrongly

debited to repairs account, now rectified)

 

6. Building A/c                                               Dr.                            28,000

To Purchases A/c                                                                                                             28.000

(Being material purchased for construction of building was wrongly

debited to purchases account, now rectified)

 

7. Building A/c                                              Dr.                                1,600

To Miscellaneous Expenses A/c                                                                                     1,600

(Being cost of construction of new canteen wrongly debited to

miscellaneous expenses account, now rectified)

Machinery account will be debited in the following cases :

 

1 . Purchases of machinery.

2.  Repair to second hand machinery.

3. Payment of freight and cartage on new machinery.

4. Payment of installation or erection charges on the new machinery.

 

In this way, furniture account, vehicles account and other assets accounts are debited, when they are acquired or purchased. Expenses incurred as freight, cartage and any other expenses which add to the cost of  the assets are debited to the assets account. When an old or second hand asset is purchased, major repairs therein is must. Such repairs will make the asset intact and thus will add to its cost. This is why, assets account  is debited. If repairs to assets are made as a routine, simply to maintain the efficiency of the asset, so repairs account will be debited.

 

Amount received from sale of assets are known as capital receipts. In case of sale of assets, assets  accounts are credited, crediting sales account for sale of assets will be incorrect.

 

( Treatment of Revenue Expenditure/Income )

 

This expenditure is incurred to meet day-to-day requirement of the business such as payment of wages, salaries, rent and insurance etc. It is also incurred for the maintenance of assets such as repairs, renewals and maintenance of building, plant, machinery, furniture and vehicles etc. Regularity in the payment of expenditure is its distinct feature. Expenses are usually incurred throughout the year. These expenses do not add to profit earning capacity of the business. These are simply incurred as a part of routine business activity. These expenses accounts are debited, when they are paid. For example, it will be incorrect to debit the workers’ accounts in case of making payment of wages to them. In this way, salaries account is debited for making payment of salaries. It will be incorrect to debit the account of the employee/who has been receiving salaries. In the same way, while making payment of rent to landlord, rent account will be debited not the landlord’s account. It should be noted that when expenses are paid, concerned expenses account will be debited and not account of person or parties whom payment is made.

 

In the same way regular receipt of income as routine business receipt is revenue income, such as receipt of commission, interest, discount rent etc. While passing Journal Entry, Revenue Ale will be credited  instead of the person or party from whom it has been received.

 

Illustration 9. Rectify the following errors :

  1. Payment of wages to Ram Lal was debited to his personal account with $. 3, 000.
  2. Payment of salaries to Srikant, the manager amounting to $. 7,000 was debited to Srikant’s account.
  3. Rent paid to landlord was debited to his personal account with $. 2,000.
  4. Interest received from Rajeev was credited to Rajeev’s account with $. 700.
  5. Commission received from Mls Sharma Bros., was credited to their account with $.300.
  6. Repair charges amounting to $. 1,000 were paid to Salim, the motor mechanic were           debited to his account.

 

 

Solution.                      Rectified Journal Entries

Amount

Date                            Particulars                         L.F.

        Debit                         Credit

                                                                                                         $.                                   $.

l.  Wages A/c                                                    Dr.                          3,000

To Ram Lal’s A/c                                                                                                              3,000

(Being wages paid to Ram Lal wrongly debited to his account. now rectified)

 

2. Salaries Alc                                                   Dr.                          7,000

To Srikant’s A/c                                                                                                           7,000

(Being payment of salaries to Srikant was wrongly debited to his

personal account now rectified)

 

3. Rent Ace                                                     Dr.                            2,000

To Landlord’s Personal A/c                                                                                         2,000

(Being payment of rent to landlord was wrongly debited to

h.is personal account. now rectified)

 

4. Rajeev’s A/c                                                 Dr.                            700

To Interest A/c                                                                                                                   700

(Being interest received from Rajeev was wrongly credited to

Rajeev’s account, now rectified)

 

5. Mls Sharma Bros. A/c                                  Dr.                               300

To Commission A/c                                                                                                             300

(Being commission received from Mls. Sharma Bros. was

wrongly credited to their account, now rectified)

 

6. Repairs A/c                                                  Dr.                               1,000

To Salim’s A/c                                                                                                                     1,000

(Being repair charges paid were wrongly debited to Salim,

the mechanic’s account, now rectified)

 

Explanation. In case of 1, 2, 3 and 6th error, personal accounts have been wrongly debited for expenses paid instead of specific expense account. This is why, expenses accounts have now been debited(which should have been correctly done) and personal account credited to neutralize the effect of these accounts unnecessarily debited. In the same way, in case of 4th and 5th errors personal accounts have been debited and income account credited.