Question

Wrong classification of expenses into revenue and capital expenditure lead to_________.

• A. under statement of profit or loss
• B. over statement of profit or loss
• C. distortion in current ratio
• D. either (a) and (b)

Answer 1

Answer: (D)

either (a) and (b)

Wrong classification of expenditure in to revenue and capital is an error of principal. In such case, trial balance may agreed but this will show under or over statement of profit.

For example, Rs. 5000 wages paid for installation of machine is a capital expenditure. If this is considered as revenue expenditure. This will result an understatement of profit.