Misclassification of capital as revenue expenditure

Steps:

• Capital expenditure on asset improvements should increase non-current asset carrying value and be depreciated over time.
• Recording it as revenue expenditure means it's fully expensed in the current period, not added to assets.
• This omission understates non-current assets by the expenditure amount.
• The immediate expensing increases expenses, understating profit for the year.

Why D is correct:

• Under accounting standards (e.g., IAS 16), capital expenditures capitalize costs to assets, deferring expense via depreciation; treating as revenue violates this, reducing both assets and profit.

Why the others are wrong:

• A: Both are understated, not overstated, as costs aren't capitalized or deferred.
• B: Profit is understated from higher expenses, not overstated.

Final answer: D