How are the financial statements affected if a capital expenditure is incorrectly classified as a revenue...

How are the financial statements affected if a capital expenditure is incorrectly classified as a revenue ex

Expert Solution

If a Capital Expenditure is incorrectly classified/treated as a Revenue Expenditure it effects on :

a) Profit/Loss statement reported for the Financial year. (Under-statement)

b) Non-Current assets in the Balance sheet as on reporting period. (Under-statement)

Eg: A Machine costing $ 450,000 was purchased on 06.12.2020 and the accountant charged to Profit and Loss statement (Revenue Expenditure) instead of Capitalising the same as Plant & Machinery (Fixed Assets).

Impact: a) Profit for the reporting period is under-stated by $ 450,000, Hence, Profit is under-stated which impacts on the Company's performance and leads to Incorrect decisions by Stake Holders.

b) Depreciation on the Machinery is not charged to P/L statement over the useful life of the Asset. As the entire expenditure is charged to P/L,

c) Non-Current Assets - Fixed Assets are under-stated by $ 450,000. It impacts the Financial data as a whole.

jeff jeffy answered 1 year ago

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