Effects of Incorrect Treatment of Expenditure (Edexcel IGCSE Accounting)

Spec point — IGCSE_ACCOUNTING:S2.135

Effects of incorrect treatment of expenditure

What are the effects of treating capital expenditure as revenue expenditure?

• Incorrectly treating capital expenditure as revenue expenditure will affect the financial statements

• It will incorrectly appear as an expense on the income statement

  • The expenses will therefore be overstated
  • This means the profit for the year will be understated

• It will not appear as a non-current asset on the statement of financial position

  • The non-current assets will therefore be understated
  • The capital will be understated because of the understated profit

What are the effects of treating revenue expenditure as capital expenditure?

• Incorrectly treating revenue expenditure as capital expenditure will affect the financial statements

• It will not appear on the income statement

  • The expenses will therefore be understated
  • This means the profit for the year will be overstated

• It will incorrectly appear on the statement of financial position

  • The non-current assets will therefore be overstated
  • The capital will be overstated because of the overstated profit

How do I treat low-valued non-current assets?

• Some non-current assets have a small cost to the business

  • Calculators
  • Staplers
  • Waste bins

• The accounting concept of materiality means that a business should treat these items as expenses rather than non-current assets

  • These will appear on the income
  • These will not appear as non-current assets on the statement of financial position

Worked Example Ajax paid $2 000 for installation costs of new equipment. He treated this as revenue expenditure.

Describe what effects this will have on the financial statements. Ignore any depreciation costs.

Answer

Final answer: The $2 000 has been incorrectly posted to the income statement as an expense. Therefore the expenses are overstated by $2 000 which means the profit is understated by $2 000.**

Final answer:** The $2 000 has been omitted from the statement of financial position. Therefore the non-current assets are understated by $2 000. The capital is also understated by $2 000 because the profit has been understated.**