Explain the effects of the following error on the Balance sh

Explain the effects of the following error on the Balance sheet and the Income statement in the current year and the succeeding years.

- An expenditure was incorrectly debited to the \"Vehicle\" account instead of to Repair Expense.

Solution

Effect on Income Statement

As the Expense was wrongly recorded as fixed Asset , expenses will get reduced which result in increase in net income during the current Period. In the Succedings year depreciation cost will be higher and will result in decrease in net income.

Effect on Balance Sheet

As Expense is wrongly entered as fixed asset ,fhence asset will be overstated and also shareholderequity will be overstated because of increase in the net income.