Misclassification of Drawings as Expenses

Steps:

• Personal expenses are drawings for a sole trader, not deductible business expenses.
• Including them in the income statement overstates expenses.
• Overstated expenses reduce reported profit below the true business profit.
• Capital decreases by the drawing amount regardless (via profit or directly), so the error leaves capital unchanged.

Why C is correct:

• Profit is understated per the accounting equation (Profit = Revenue - Expenses), as non-business expenses inflate total expenses; capital remains accurate since drawings reduce owner's equity equivalently in either treatment.

Why the others are wrong:

• A: Profit is understated, not unaffected.
• B: Profit is affected (understated).
• D: Capital is unaffected, not understated.

Final answer: C