Question

Suggest one (1) consequence of improperly classifying an account type (e.g., if an expense is classified...

Suggest one (1) consequence of improperly classifying an account type (e.g., if an expense is classified as an asset or an asset is classified as an expense). Describe the effect on at least two (2) of the four (4) major financial statements: Profit & Loss (Income) Statement, Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows.

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Answer #1

Answer: consequence

Incorrect expense reporting can distort a company's computed operating profit margins or could result in over-reporting of income and it will not present true and fair view of financial position of the company.

Effect on Financial statements:

1) Effect on Profit & Loss (Income) Statement : If an expense classified as assets then it result in over reporting of income.

2) Balance Sheet Statement : If an expense classified as assets then it result in over reporting of assets.

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