Q.Installation charges paid on newly purchased machinery should be treated as:
(A) Revenue Expenditure, debited to the Profit and Loss Account
(B) Capital Expenditure, added to the cost of the machinery
(C) A Deferred Revenue Expenditure, written off over 3 years
(D) A Capital Receipt

Installation charges are necessary to bring this specific machine into working condition for the first time, so they are added to the asset's own cost rather than treated as a standalone running expense.

Work through each option against the rule stated above; the charge is neither a recurring running cost, a large deferred item, nor any kind of receipt.

Expenditure needed to bring a newly acquired asset into working condition for the first time — installation and erection charges being the standard example — is added to the cost of that asset, because without it the machine could not be used at all; it is not a routine running expense but part of what it genuinely cost to acquire a usable machine.

Option-by-option analysis:

• (A) Incorrect — this is not a recurring running expense; it is a one-time cost of bringing a specific asset into use.
• (B) Correct — installation charges are capitalised, added to the machinery's cost.
• (C) Incorrect — Deferred Revenue Expenditure applies to large, benefit-spread-over-years revenue items like a heavy advertisement campaign, not to asset-acquisition costs.
• (D) Incorrect — this is an expenditure (a cash outflow), not any kind of receipt.