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