Compton Inc. made a $500 ordinary repair to a piece of equipment. Compton's accountant debited this amount to the asset account, Equipment and credited Cash. Was this the correct entry and if not, why not

The entry was incorrect. The repair cost was a revenue expenditure which should have been recorded as an expense and expensed out in the profit and loss account rather than as a debit to the asset account and increasing the value of the asset.

Explanation:

The entry made by the accountant was incorrect.

The repairs to the equipment were ordinary repairs which fall under the category of revenue expenditure. Revenue expenditures are expenditures of a recurring nature which are short term expenditures and are made to ensure the continuous operation of the business and its assets. They do not add value to the asset. Thus, the correct way to record a revenue expenditure is to treat it as an expense rather than adding it to the value of the asset.

The correct entry to record this transaction would have been,

Repair expense      500 Dr

   Cash                           500 Cr

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