Misclassifying Expenses as Capital Items

Steps:

• Revenue expenses reduce profit immediately in the income statement.
• Capital expenditures are recorded as assets and depreciated gradually.
• Incorrectly capitalizing an expense avoids immediate deduction from revenue.
• Result: Current-year profit increases (overstated), and total expenses decrease (understated).

Why B is correct:

• Per accrual accounting principles, expenses must be matched to the period incurred; capitalizing defers recognition, inflating current profit via the formula Profit = Revenue - Expenses.

Why the others are wrong:

• A: Identical to B, but listed separately—likely a formatting error; effect matches B.
• C: Reverses the impact; would occur if capital items were expensed immediately.
• D: Same as C; incorrectly suggests profit decreases from capitalizing.

Final answer: B