Effects of Incorrect Treatment of Capital and Revenue Items


As we know about capital and revenue items. These are:

(1) Capital Expenditure

(2) Revenue Expenditure

(3) Capital Receipt

(4) Revenue Receipt

Effects of Wrong/Incorrect Treatment of Capital Expenditure in Financial Statements:

If accountant treat capital expenditure as revenue expenditure, then following effects took place in financial statements:

Effect in Income Statement:

Due to overstatement of revenue expenditure, net profit will be understated.

Effect in Balance Sheet:

Understatement of capital expenditure will understate book value of non-current assets.

Effects of Wrong/Incorrect Treatment of Revenue Expenditure in Financial Statement:

If accountant treat revenue expenditure as capital expenditure, then following effects took place in financial statements:

Effect in Income Statement:

Due to understatement of revenue expenditure, net profit will be overstated.

Effect in Balance Sheet:

Overstatement of capital expenditures will overstate book value of non-current assets.

Effects of Wrong/Incorrect Treatment of Capital and Revenue Receipts in Financial Statements:

If a capital receipt is treated as revenue receipt then it will overstate profits and if a revenue receipt is recorded as capital receipt then it will understate profits.