Distinguishing Revenue vs. Capital Expenditures

Steps:

• Classify expenditures: redecoration of premises (revenue, $2000) and motor vehicle insurance (revenue,$5000) are ongoing costs; machinery purchase (capital, $10000) is an asset acquisition.
• Exclude capital expenditures from the income statement, as they are capitalized on the balance sheet.
• Sum revenue expenditures: $2000 (redecoration) +$5000 (insurance) = $7000.
• Charge this total to the profit and loss account for the year.

Why A is correct:

• Revenue expenditures like redecoration and insurance are expensed in the income statement under accrual accounting to match costs with revenue.

Why the others are wrong:

• B: Excludes redecoration, understating revenue costs.
• C: Incorrectly includes partial machinery, mixing capital and revenue.
• D: Includes full machinery purchase, violating capital expenditure rules.

Final answer: A