Effects of Incorrect Treatment of Expenditure (Edexcel IGCSE Accounting)
Revision Note
Written by: Dan Finlay
Reviewed by: Lucy Kirkham
Effects of Incorrect Treatment of Expenditure
What are the effects of treating capital expenditure as revenue expenditure?
Incorrectly treating capital expenditure as revenue expenditure will affect the financial statements
It will incorrectly appear as an expense on the income statement
The expenses will therefore be overstated
This means the profit for the year will be understated
It will not appear as a non-current asset on the statement of financial position
The non-current assets will therefore be understated
The capital will be understated because of the understated profit
What are the effects of treating revenue expenditure as capital expenditure?
Incorrectly treating revenue expenditure as capital expenditure will affect the financial statements
It will not appear on the income statement
The expenses will therefore be understated
This means the profit for the year will be overstated
It will incorrectly appear on the statement of financial position
The non-current assets will therefore be overstated
The capital will be overstated because of the overstated profit
How do I treat low-valued non-current assets?
Some non-current assets have a small cost to the business
Calculators
Staplers
Waste bins
The accounting concept of materiality means that a business should treat these items as expenses rather than non-current assets
These will appear on the income
These will not appear as non-current assets on the statement of financial position
Worked Example
Ajax paid $2 000 for installation costs of new equipment. He treated this as revenue expenditure.
Describe what effects this will have on the financial statements. Ignore any depreciation costs.
Answer
The $2 000 has been incorrectly posted to the income statement as an expense. Therefore the expenses are overstated by $2 000 which means the profit is understated by $2 000.
The $2 000 has been omitted from the statement of financial position. Therefore the non-current assets are understated by $2 000. The capital is also understated by $2 000 because the profit has been understated.
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