In accounting there are two main mandatory financial statements and these report the financial position and the financial performance of a company. These two financial statements are known as the balance sheet and the profit and loss account. The balance sheet is the home to all capital expenditures and all revenue expenses are recorded in the profit and loss account.
Failure to distinguish the difference between revenue expenses and capital expenses can lead to a misleading picture of both the financial performance and financial position being reported or presented to the users of accounting information.
In book-keeping and accounting there is a type of error known as the error of principle. This error occurs when capital expenditure is treated as revenue expenditure in the books of accounts and vice versa. When a firm deliberately misclassifies revenue expenditure as capital expenditure this may be viewed as creative accounting, which is morally and ethically wrong. Below these two concepts are explored further.
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