Question

Which of the following items should be treated as capital expenditure in the accounts of a sole trader?

1) £1,000 drawings made by the proprietor to buy himself a new kitchen at home.
2) £1,000 spent on purchasing a new computer for his secretary in order to deal with business administration.
3) £1,000 on purchasing a motorbike for resale.
4) £1,000 paid to a painter for redecorating his office.

Answer 1

In the accounts of a sole trader, the £1,000 spent on purchasing a new computer for the secretary to deal with business administration should be treated as a capital expenditure. The other options do not qualify as capital expenditure.

Step-by-step explanation:

In the accounts of a sole trader, the item that should be treated as a capital expenditure is option 2: £1,000 spent on purchasing a new computer for the secretary to deal with business administration.

Capital expenditure refers to the spending on assets that will provide long-term benefits to the business, such as equipment or property. The computer purchased for business administration falls under this category, as it is an investment in a durable asset that will be used by the business over a period of time.

The other options do not qualify as capital expenditure:

1. £1,000 drawings made by the proprietor to buy a new kitchen at home is a personal expenditure and not related to the business.
2. £1,000 spent on purchasing a motorbike for resale is a purchase for inventory, which is classified as an operating expense or cost of goods sold.
3. £1,000 paid to a painter for redecorating the office is an expense for maintaining the office and would be classified as a revenue expenditure.