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Basic Accountancy Procedures
Under the cost concept, which components are capitalised when purchasing a fixed asset like a currency-sorting machine?
Invoice price, freight, import duty, and installation charges are all capitalised as part of the asset cost. Annual maintenance contracts paid upfront are treated as revenue expenses, not capital.
Under the accrual basis of accounting, how is profit calculated when cash sales are Rs.8,00,000, credit sales Rs.5,00,000, salaries paid Rs.3,00,000 with Rs.40,000 outstanding, and rent paid Rs.1,20,000 for 15 months?
Profit = Rs.8,76,000 (total sales Rs.13,00,000 minus salaries Rs.3,40,000 minus rent for 12 months Rs.96,000)
Why is an annual maintenance contract (AMC) paid upfront treated as a revenue expense rather than capitalised?
An AMC provides periodic servicing and does not enhance the asset's value or extend its useful life in a capital sense. It is therefore charged to the Profit and Loss Account as a revenue expense.
What is the money measurement concept in accounting?
Only transactions expressible in monetary terms can be recorded in the books of accounts; non-monetary factors like customer goodwill or employee morale cannot be recorded.
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