The effect of recording a capital expenditure as a revenue expenditure is that:
A) expenses are overstated, and owners' equity is understated.
B) net profit is understated, and owners' equity is overstated.
C) expenses are understated, and accumulated depreciation is overstated..
D) assets are overstated, and expenses are understated.

Question

Quizplus · Accepted Answer

Recording a capital expenditure as a revenue expenditure leads to an overstatement of expenses in the income statement, which reduces net income and, consequently, owners' equity. This is because capital expenditures, which should be capitalized and depreciated over time, are instead expensed immediately, affecting the financial statements inaccurately.

The Effect of Recording a Capital Expenditure as a Revenue