Question

Mehra & Sons purchased a second-hand light motor Vehicle at a cost of Rs 2 lacs. Additionally, various accessories costing Rs. 50000 were also purchased along with the Vehicles which are required to be replaced on a yearly basis. Mr. Mehra wants to write off the overall outflow in Income statement. Discuss, whether he is correct or not? Discuss the need to differentiate between the capital and revenue items? How these items are to be treated in the financials of the company? Give reasons supporting the same

Answer 1

The answer is stated below:

Explanation:

• When writing off the expenditure it is vital to separate among the capital and revenue expenditure. As revenue expenditure are set off against the income in the same year.

• Capital expenditure are set off over the period of their estimated useful lives. So, in this case, the second hand light motor vehicle is to be a capital expenditure, which is not be written off fully in the present year but the other accessories which are replaced on annual base could be set off against the income in the present year.

• In short, the motor vehicle will be treated as capital expenditure as the benefit will accrue over the period of time but in the case of accessories they could be written off in the same year.

• No, Mr Mehra is not right as he wants to write off whole outflow in Income Statement.

You can learn more from here about capital expenditure:

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