Syllabus Edition
First teaching 2025
First exams 2027
Effects of Incorrect Treatment of Expenditure & Receipts (Cambridge (CIE) IGCSE Accounting): Revision Note
Exam code: 0452 & 0985
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 statement of profit or loss
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 statement of profit or loss
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 principle 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:
The $2 000 has been incorrectly posted to the statement of profit or loss as an expense. Therefore, the expenses are overstated by $2 000 which means the profit is understated by $2 000.
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.
Effects of incorrect treatment of receipts
What are the effects of treating capital receipts as revenue receipts?
Incorrectly treating capital receipts as revenue receipts will affect the financial statements
Their full value will incorrectly appear as income on the statement of profit or loss
The income will therefore be overstated
This means the profit for the year will be overstated
What are the effects of treating revenue receipts as capital receipts?
Incorrectly treating revenue receipts as capital receipts will affect the financial statements
They will not appear on the statement of profit or loss
The income will therefore be understated
This means the profit for the year will be understated
Worked Example
Makkari’s draft statement of profit or loss for the year ended 29 February 2024 stated a profit of $45 700. Makkari took out a bank loan for $10 000 on 5 January 2024. However, this was incorrectly treated as a revenue receipt.
Calculate the correct profit for the year ended 29 February 2024.
Answer:
The money received from the bank loan was incorrectly included as an income on the statement of profit or loss. This is a capital receipt and therefore it should not appear on the statement of profit or loss. The income on the statement of profit or loss needs to be reduced by $10 000.
The profit for the year ended 29 February 2024 is $35 700
Unlock more, it's free!
Was this revision note helpful?
