A sole trader spends Rs. 120,000 extending the useful capacity of an existing machine. How is this expenditure normally classified?
Correct answer: C. As a selling expense
- A. As a revenue expense
- B. As a capital expenditure
- C. As a selling expense
- D. As an accrued liability
Explanation
Expenditure that increases an asset's useful capacity provides benefits beyond the current accounting period, so it is capital expenditure. It is added to the machine's carrying amount rather than charged fully as a current expense.
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About Financial Statements of Sole Traders
Sole trader statements calculate revenue, cost of sales, gross profit, operating expenses and net profit, then present assets, liabilities and owner’s capital in the statement of financial position. Adjustments for closing inventory, accruals, prepayments, depreciation, bad debts, drawings and additional capital connect the two statements.
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