Q. Why has depreciation been accounted the way it has been? Explain.
Dear Student,
Here, revenue expenditure (repairs to car) has been treated as capital expenditure (debited to Vehicle A/c). Now, this mistake has caused another error i.e. depreciation has been charged on vehicle. However, on repairs spent there should be no depreciation. Now, this depreciation debited to Profit and Loss A/c must have reduced firm's profit by 5,000 which should not have been the case actually. Therefore, 5,000 is added to the profit figure of financial years 2015-16 & 2016-17.
Here, revenue expenditure (repairs to car) has been treated as capital expenditure (debited to Vehicle A/c). Now, this mistake has caused another error i.e. depreciation has been charged on vehicle. However, on repairs spent there should be no depreciation. Now, this depreciation debited to Profit and Loss A/c must have reduced firm's profit by 5,000 which should not have been the case actually. Therefore, 5,000 is added to the profit figure of financial years 2015-16 & 2016-17.