Effects-Of-Incorrect-Treatment-Of-Expenditure Igcse Edexcel

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