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

Question

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Capitalizing the payment means that the accountant classified it as a long-term asset instead of expensing it in the current period. This will cause assets to be overstated on the balance sheet, which will also affect the calculation of net income on the income statement since expenses would be lower. Therefore, net income will be overstated rather than understated if a payment that should have been recorded as a revenue expenditure has been capitalized.

A Company's Accountant Capitalized a Payment That Should Have Been