A business purchases office equipment for Rs. 90,000 and records the entire amount as an expense. Before correcting the error, what is the likely effect on the financial statements, ignoring depreciation?
Correct answer: B. Assets understated and profit understated
- A. Assets overstated and profit overstated
- B. Assets understated and profit understated
- C. Assets overstated and liabilities understated
- D. Assets and profit both unaffected
Explanation
The equipment should be recognised as a non-current asset rather than as an immediate expense. Recording it as an expense understates assets by Rs. 90,000 and understates profit by the same amount, before considering depreciation. No liability is created by the cash purchase.
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About Financial Statements
Financial statements present a business's financial performance and position through the income statement, statement of financial position, cash flow statement and changes in equity. Questions involve preparing and interpreting these statements, adjusting entries, depreciation, closing inventory, accrued and prepaid items, and distinguishing profit from cash flow.
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