If a revenue expenditure is treated as a capital expenditure, then:
A) expenses are overstated and owners' equity is understated.
B) expenses are overstated and assets are overstated.
C) expenses are understated and owners' equity is overstated.
D) net income is overstated and owners' equity is understated.

Question

Quizplus · Accepted Answer

When a revenue expenditure is treated as a capital expenditure, the expense is not recognized in the income statement immediately, leading to an understatement of expenses. Consequently, net income and owners' equity are overstated because the expense that should have reduced them is capitalized on the balance sheet, increasing assets.

If a Revenue Expenditure Is Treated as a Capital Expenditure