A company's accountant capitalized a payment that should be recorded as a revenue expenditure.How will this error affect the financial statements of the company?

Question

Quizplus · Accepted Answer

Capitalizing a payment that should be recorded as a revenue expenditure will lead to overstating of assets. This is because instead of recording the payment as an expense, it is recorded as an asset and added to the balance sheet. This, in turn, will overstate the company's assets and result in an incorrect financial statement. Neither expenses nor liabilities will be overstated, but net income will be understated as the payment is not recorded as an expense, reducing the company's profit.

A Company's Accountant Capitalized a Payment That Should Be Recorded