Misclassification of Capital as Revenue Expenditure

Steps:

• Capital expenditure adds to assets and is depreciated over time, not fully expensed in the current year.
• Treating it as revenue expenditure expenses it fully now, skipping asset recognition.
• This understates assets by not recording the item on the balance sheet.
• It also understates profit by charging the full cost against current revenue instead of depreciating gradually.

Why D is correct:

• Per accounting standards (e.g., IAS 16), capital items are balance sheet assets; expensing them violates the matching principle, reducing both assets and current profit.

Why the others are wrong:

• A: Assets are understated, not overstated, due to missing capitalization.
• B: Both are understated, not overstated, from improper expensing.
• C: Profit is understated, not overstated, from full immediate charge.

Final answer: D