If the cost of a new machine is wrongly recorded as an ordinary expense, what is the immediate effect on reported profit?
Correct answer: B. Profit is understated
- A. Profit is overstated
- B. Profit is understated
- C. Profit is unchanged
- D. Capital is overstated
Explanation
A machine is a capital asset, so its full cost should not normally be charged as a current expense. Recording the entire cost as an expense makes current profit too low, although the asset and capital are also understated.
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About Incomplete Records
Incomplete records require profit and financial position to be reconstructed when a complete double-entry system is unavailable. Methods include statements of affairs, capital comparisons, control accounts, cash summaries and margin calculations to find missing sales, purchases, expenses, assets, liabilities and drawings, while distinguishing business profit from changes in capital.
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