Accounting – 4.1 Capital and revenue expenditure and receipts | e-Consult

This is a capital receipt. The purchase of a new machine is an investment in the business's future and will provide benefit for more than one accounting period. It increases the company's assets (specifically, the value of the machinery). This is a fundamental characteristic of capital receipts.

Accounting Treatment:

• The purchase of the machine would be recorded as a debit to the cost of the machine (an asset account) and a credit to the account payable (or other liability account) because the machine was purchased on credit.
• The machine itself will be shown on the balance sheet as an asset.
• The cost of the machine will be depreciated over its useful life, and this depreciation expense will be recorded in the income statement each year. This is how the cost of the asset is allocated to the periods in which it provides benefit.