Incorrect Treatment of Capital and Revenue Expenditure and Receipts.

Incorrect treatment of Capital and Revenue Expenditure and Receipts.

Incorrect treatment of Capital and Revenue Expenditure and Receipts effects the profit for the year and values in the Statement of Financial Position.

The following examples and explanation helps you to calculate and comment on the effect on profit for the year and asset valuation of the incorrect treatment of capital and revenue expenditure and capital and revenue receipts.

So, let's explore this section:



Incorrect treatment of Capital and Revenue Expenditure.

Incorrect treatment of Capital and Revenue Expenditure occurs if:

1. Capital expenditure is mistakenly treated as Revenue Expenditure  

                                               Or

2. Revenue expenditure is mistakenly treated as Capital Expenditure

In both these cases, the incorrect treatment of expenditure effects the Profit for the year in the Income Statement and Non-Current Assets in the Statement of Financial Position.

The following table explains the effect of incorrect treatment of expenditure on Profit for the year and the value of Non-Current assets.

Incorrect treatment What happens? Effect on Profit for the year Effect on asset valuation
Capital Expenditure incorrectly treated as Revenue Expenditure Expenses will be shown more. So, the profit for the year will be incorrect in the Income statement.

The Non-current asset will be shown less. So, the Non-current asset value will be incorrect in the Statement of Financial Position.
Profit for the year will be understated Non-current assets will be understated
Revenue Expenditure incorrectly treated as Capital Expenditure Expenses will be shown less. So, the Profit for the year will be incorrect in the Income statement.

The Non-current asset will be shown more. So, the Non-current asset value will be incorrect in the Statement of Financial Position.

Profit for the year will be overstated Non-current asset will be overstated

Check out the Quora answers on Capital and Revenue Expenditure and Receipts.


Incorrect treatment of Capital and Revenue Receipts.

Incorrect treatment of receipts occurs if:

1. Capital receipt is mistakenly treated as Revenue receipt

                                               Or

2. Revenue receipt is mistakenly treated as Capital receipt

In both these cases, the incorrect treatment of receipts effects the Profit for the year in the Income Statement and Non-Current Liability  or  Non-Current Asset in the Satement of Financial Position.

Incorrect treatment What happens? Effect on Profit for the year Effect on Statement of Financial Position
Capital Receipt incorrectly treated as Revenue Receipt Receipts will be shown more, so the profit for the year will be incorrect in the Income statement.

The Non-current asset will be shown more or Non-current liability will be shown less. So, the value of Non-current assets or the value of Non-current liability will be incorrect in the Statement of Financial Position.
Profit for the year will be overstated Non-current asset will be overstated or Non-current liability will be understated.
Revenue receipts incorrectly treated as Capital receipts Receipts will be shown less, so the profit for the year will be incorrect in the Income statement.

The Non-current asset will be shown less or The Non-current liability will be shown more. So the Non-current asset value or Non-current liability value will be incorrect in the Statement of Financial Position.

Profit for the year will be understated. Non-current asset will be understated or Non-current liability will be overstated.

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