Q.If a Capital Expenditure is wrongly treated as a Revenue Expenditure in a given year, the effect is:
(A) Both profit and fixed assets are overstated
(B) Both profit and fixed assets are understated
(C) Profit is overstated but fixed assets are understated
(D) Profit is understated but fixed assets are overstated

Wrongly charging the full amount to this year's Profit and Loss Account both eats into this year's profit AND means the asset never gets recorded on the Balance Sheet at all.

Treating a Capital Expenditure as Revenue means the full amount is wrongly charged to this year's Trading/Profit and Loss Account (instead of being capitalised and only depreciated), which understates this year's profit; simultaneously, the asset itself never gets recorded on the Balance Sheet, understating fixed assets by the same amount.

Option-by-option analysis:

• (A) Incorrect — this describes the OPPOSITE error (Revenue treated as Capital). …