Enforcement Officer / Accounts Officer (EO/AO) 2020 recruitment test, advertisement 421. Transcribed from the Commission's own booklet (series A, NMJX-U-GTA); answer as per the official UPSC final answer key. This question is in Part B. Answer last reviewed 24 August 2026.

Wages paid for installation of machinery is debited to which one of the following accounts ?

(a)Wages Account
(b)Machinery Account
(c)Installation Account
(d)Profit and Loss Account

Answer

Why

Correct — B, (b) Machinery Account. The question is not about wages at all; it is about what the money bought. Wages paid to workers for erecting and installing a machine are incurred to bring the machine to the place and the condition in which it can actually be used, and an outlay of that kind is part of the cost of the asset rather than an expense of the period in which it happens to be paid. It is therefore capitalised — debited to Machinery Account, so that the machine appears in the books at what it truly cost to get running, not merely at the invoice price. The accounting standards say so in as many words: under AS 10 on Property, Plant and Equipment, and Ind AS 16 for companies applying the converged standards, the cost of an item includes its purchase price together with any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management, and installation and assembly costs are named as an example. The amount is not lost to the Profit and Loss Account; it reaches it gradually, as depreciation over the machine's useful life, which is the matching principle doing its work — a cost that will earn revenue for several years is spread over those years instead of falling entirely on one. Two book-keeping consequences follow and are worth carrying: the depreciation charge every year is larger because the base is larger, and any profit or loss on the machine's eventual sale is measured against this fuller cost.

Why the others are wrong

(a)Wages Account — This is the natural debit and the wrong one, because it follows the description of the payment instead of its purpose. Wages Account is a nominal account that collects the cost of labour consumed in running the business during the period, and its balance is closed off to the Trading or Profit and Loss Account at the year end. Sending installation wages there charges the whole outlay against one year's profit and leaves the machine understated in the Balance Sheet for the rest of its life. That is an error of principle — capital expenditure treated as revenue — and it has a property worth remembering alongside the trial balance items in this same block: because the entry is still a complete double entry of equal amount, the trial balance agrees perfectly and reveals nothing. The same reasoning capitalises the freight on bringing the machine in and the cost of the foundation it stands on.
(c)Installation Account — There is no such account in a standard ledger, and that is the point of the option — it invites a candidate who has grasped that the wages are not ordinary wages but has not carried the thought through to where the amount finally rests. A firm may open a temporary collection account while a large installation is in progress, gathering the erection wages, the contractor's fees and the foundation costs in one place, but that account is not a resting place: its total is transferred to Machinery Account when the machine is ready for use, because what the Balance Sheet must show is an asset, not an accumulation of installation costs. An account that survived to the year end under this name would report something that is neither an asset nor an expense.
(d)Profit and Loss Account — Two things are wrong here at once. The first is the same error of principle as in (a), only stated more baldly: charging the entire cost of getting a long-lived asset into service against the profit of a single year understates that year's profit, overstates every later year's, and leaves the asset in the books at less than it cost. The second is a matter of book-keeping mechanics. Payments are not debited straight to the Profit and Loss Account; they are debited to the appropriate nominal account, and the nominal accounts are closed off to the Profit and Loss Account at the end of the period. An option that debits the Profit and Loss Account directly with a payment is describing a step that does not exist in double-entry book-keeping.

Concept

The whole item rests on the distinction between capital and revenue expenditure. Capital expenditure brings a new asset into existence, or adds to the earning capacity or working life of an existing one, and its benefit runs beyond the current accounting period; it is debited to the asset account and reaches profit only through depreciation. Revenue expenditure keeps the business running or maintains an asset in its existing condition; its benefit is consumed within the period and it is written off against the profit of that period. Applying the test to a payment for labour: wages paid to erect a machine are capital, because until the erection is finished there is no usable machine; wages paid to operate the same machine next month are revenue. The list of costs that attach to a machine's ledger account is longer than most candidates expect — purchase price net of trade discount, non-refundable duties and taxes, freight and insurance in transit, loading and unloading, site preparation and foundations, erection and installation wages, technicians' fees, and trial-run costs. Repairs bought with a second-hand machine and carried out before it is first used are capital as well, because they are part of making it usable; the identical repair a year later is revenue.

The accountancy blocks on an EPFO EO/AO paper test whether a candidate can classify a payment, because that is what an Accounts Officer actually does when reading an employer's books, and it is where a determined employer can shift the picture. The stem here is deliberately spare — nine words and a list of four account names — and it gives no hint of the principle involved. There is one printing feature to note and not to correct: the booklet sets the stem as 'Wages ... is debited', a disagreement between the plural subject and the singular verb. It is the Commission's own setting, it survives into the transcription unaltered, and it changes nothing about what is being asked.

Key facts

Wages paid for the installation of machinery are capital expenditure and are debited to Machinery Account.
AS 10 and Ind AS 16 include in the cost of an asset all costs directly attributable to bringing it to the location and condition necessary for it to be capable of operating as intended, and name installation and assembly costs among them.
Capitalised installation cost reaches the Profit and Loss Account gradually, as depreciation over the asset's useful life.
Freight, insurance in transit, import duty, unloading, site preparation and erection wages on a machine are all debited to Machinery Account.
Repairs to a second-hand machine carried out before its first use are capitalised; identical repairs afterwards are revenue expenditure.
Charging capital expenditure to a revenue account is an error of principle, and it leaves the trial balance in agreement because both sides of the entry are equal.
Wages paid to run a machine already in service are revenue expenditure and are debited to Wages Account.

The question is not about wages — it is about what the money bought

Machinery Account→Wages paid to erect and install a machine bring it to the place and condition in which it can be used, so they are part of the COST OF THE ASSET, not an expense of the period in which they are paid. Capitalising them makes the machine appear at what it truly cost to get running rather than at the invoice price. AS 10 and Ind AS 16 include in cost every outlay directly attributable to bringing an asset to the condition necessary for it to operate as intended, and name installation costs as an example.

Wages Account→The natural debit and the wrong one, because it follows the description of the payment instead of its purpose. Wages Account is a nominal account collecting the cost of labour consumed in RUNNING the business during the period, and its balance is closed off to the Trading or Profit and Loss Account at the year end.

Installation Account→No such account exists in a standard ledger, and that is the point of the option: it invites a candidate who has grasped that these are not ordinary wages but has not carried the thought through to where the amount finally rests. A firm may open a temporary collection account while a large installation is in progress, gathering erection wages, contractor’s fees and foundation costs in one place, but its balance is transferred to the asset account when the work is done.

Profit and Loss Account→Two things wrong at once. Charging the entire cost of getting a long-lived asset into service against the profit of a single year understates that year’s profit, overstates every later year’s, and leaves the asset in the books at less than it cost. And mechanically, payments are not debited straight to the Profit and Loss Account: expenses go to their own nominal accounts and are closed off there at the year end.

The test being applied→CAPITAL expenditure brings a new asset into existence, or adds to the earning capacity or working life of an existing one, and its benefit runs beyond the current period; it is debited to the asset account and reaches profit only through depreciation. REVENUE expenditure keeps the business running or maintains an asset in its existing condition, and is written off against the profit of that period. Wages to erect a machine are capital, because until the erection is finished there is no usable machine; wages to operate the same machine next month are revenue.

What else attaches to a machine’s ledger account→Purchase price net of trade discount, non-refundable duties and taxes, freight and insurance in transit, loading and unloading, site preparation and foundations, erection and installation wages, technicians’ fees, and trial-run costs. Repairs to a second-hand machine carried out before its first use are capital too; the identical repair a year later is revenue. The capitalised amount is not lost — it reaches profit gradually as depreciation, which is the matching principle at work.

Study next

Capital, revenue and deferred revenue expenditure, with the tests that separate themAS 10 and Ind AS 16 on the components of the cost of property, plant and equipmentMethods of depreciation — straight line and written-down value — and the effect of the capitalised base on the chargeErrors of principle and the other errors a trial balance cannot discloseProfit or loss on the sale of a fixed asset, measured against its capitalised cost less accumulated depreciation

Common traps

Debiting the payment to the account named after it — wages to Wages Account — instead of to the asset it created.
Assuming a payment for labour must be revenue expenditure. It is the purpose that classifies it, not the nature of the payee.
Forgetting that the amount still reaches profit, through depreciation, so that capitalising is a matter of timing rather than of avoidance.
Debiting a payment straight to the Profit and Loss Account. Payments go to nominal accounts, which are then closed off to it.
Expecting the trial balance to catch the mistake. An error of principle keeps both columns equal.

Capital-versus-revenue classification is one of the most reliably asked ideas in the EPFO EO/AO accountancy blocks, and it is nearly always put as a single-line question naming one payment and offering four account names. The wrong options are usually the account named after the payment and the Profit and Loss Account, so the discrimination comes entirely from asking what the outlay produced.

Related PYQs

EPFO_EOAO_2020_Q86Open & attempt →

Which one of the following statements about Trial Balance is correct ?

(a) It is a book containing different accounts of an entity.
(b) It is a statement containing balances of debtors of an entity.
(c) It is a statement containing balances of debtors and creditors of an entity.
(d) It is a statement containing the various ledger balances of an entity on a particular date.

Answer(d) It is a statement containing the various ledger balances of an entity on a particular date.

The definition item that opens this accountancy block. It matters here because the mistake this question tests — capital expenditure charged to a revenue account — is precisely the kind of error that leaves a trial balance in perfect agreement, so the check described there would never reveal it.

EPFO_EOAO_2020_Q106Open & attempt →

Which one of the following denotes Gross Profit ?

(a) Cost of goods sold + Opening stock
(b) Sales less Cost of goods sold
(c) Sales less Purchases
(d) Net profit less Expenses of the period

Answer(b) Sales less Cost of goods sold

An accountancy item from the paper's second accounting block, on what Gross Profit denotes. It is the other side of this coin: whether a payment is capitalised or expensed decides which figure it lands in and therefore what the reported profit turns out to be.

Practice

practice — not a real PYQ
Carriage paid on the purchase of a new machine is debited to which one of the following accounts ?
- (a)Carriage Account
- (b)Machinery Account
- (c)Purchases Account
- (d)Profit and Loss Account
Answer(b) Machinery Account
practice — not a real PYQ
Wages paid to workers for the routine operation of a machine that is already in use are treated as which one of the following ?
- (a)Capital expenditure
- (b)Revenue expenditure
- (c)Deferred revenue expenditure
- (d)Capital receipt
Answer(b) Revenue expenditure

Why