Why is "Forgetting the depreciation knock-on" a common mistake in Effects of Incorrect Treatment of Expenditure & Income?

Why it happens: Adjusting only the misclassified amount. How to avoid it: Net profit effect = misclassified amount − the related depreciation. Always check whether a depreciation rate is given. Source: 9706 Examiner Reports

Why is "Getting the direction (over/understated) wrong" a common mistake in Effects of Incorrect Treatment of Expenditure & Income?

Why it happens: Not tracing through expenses/income. How to avoid it: Raising expenses or cutting income → profit DOWN. Cutting expenses or raising income → profit UP. Source: 9706 Examiner Reports

Why is "Adding when you should subtract in the corrected-profit statement" a common mistake in Effects of Incorrect Treatment of Expenditure & Income?

Why it happens: Confusing the error with its correction. How to avoid it: If the error OVERSTATED profit, SUBTRACT to correct; if it UNDERSTATED profit, ADD. Source: 9706 Examiner Reports

Why is "Treating full asset proceeds (not just the disposal profit) as income" a common mistake in Effects of Incorrect Treatment of Expenditure & Income?

Why it happens: Carrying over from the income subtopic. How to avoid it: Only the profit/loss on disposal is income; the excess recorded as sales overstates profit by the carrying value. Source: 9706 Examiner Reports

Why is "Including pure asset/liability errors in the corrected-profit statement" a common mistake in Effects of Incorrect Treatment of Expenditure & Income?

Why it happens: Adjusting every error found. How to avoid it: Only income/expense-affecting errors change profit. A wrong customer or misposted bank balance does not. Source: 9706 Examiner Reports

Why is "Thinking the trial balance would reveal these errors" a common mistake in Effects of Incorrect Treatment of Expenditure & Income?

Why it happens: Assuming a balanced TB is error-free. How to avoid it: These are errors of principle — both entries are made, so the TB still balances and does not detect them. Source: 9706 Examiner Reports

Cambridge International A Levels Accounting (9706)

Effects of Incorrect Treatment of Expenditure & Income

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Detailed Study Notes

Detailed notes on Capital and Revenue Income and Expenditure for Cambridge International A Levels Accounting, covering key concepts, explanations, examples, and exam-focused revision points.

Effects of Incorrect Treatment of Capital & Revenue Items — Cambridge AS & A Level Accounting 9706 Study Notes (2026-2028)

Pull the classification skill together into the calculation examiners reward most: working out exactly how a misclassification changes profit and net assets, allowing for knock-on depreciation, and preparing a statement of corrected profit.

At a glance

Misclassifying capital/revenue items is an error of principle — the trial balance still balances.
Capital expenditure treated as revenue → expenses up → profit DOWN, net assets DOWN.
Revenue expenditure treated as capital → expenses down → profit UP, net assets UP.
Capital receipt treated as income → profit UP; income treated as capital → profit DOWN.
Always allow for knock-on depreciation when expenditure is wrongly capitalised/expensed.
Profit feeds capital, so a profit error of $X also changes net assets by $X.
Corrections are shown in a statement of corrected profit (draft profit ± each adjustment).

What you’ll learn

Mapped to the Cambridge International A Level 9706 syllabus (2026-2028).

1.3.1 — Understand the effect on profit/loss and asset value of the incorrect treatment of capital and revenue expenditure and income.
Prepare a statement of corrected profit.
Link 1.4.2 — these are errors of principle that the trial balance does not detect.

The four misclassifications and their direction

Learn which way profit and net assets move for each error.

There are four ways to get the capital/revenue split wrong. Learn the direction of each so you never have to re-derive it:

Error	Effect on expenses/income	Profit	Net assets
Capital expenditure as revenue (e.g. machine cost to repairs)	Expenses up	Down	Down (asset missing)
Revenue expenditure as capital (e.g. repair added to asset)	Expenses down	Up	Up (asset too high)
Capital receipt as income (e.g. loan as sales)	Income up	Up	Mixed (liability missing / capital up)
Revenue income as capital (e.g. rent received as capital)	Income down	Down	Down (capital understated)

The shortcut: anything that wrongly increases expenses or reduces income lowers profit; anything that wrongly reduces expenses or increases income raises profit. Because profit feeds capital, the same amount changes net assets in the same direction.

All four are errors of principle (wrong class of account), so the trial balance still balances — they are not caught arithmetically.

Capital as revenue → profit down, net assets down.
Revenue as capital → profit up, net assets up.
Capital receipt as income → profit up; income as capital → profit down.
All are errors of principle → trial balance still balances.

See the full worked example for effects of incorrect treatment of expenditure & income →

Don't forget the knock-on depreciation

When expenditure is wrongly capitalised or expensed, the depreciation changes too.

The single most common slip is to adjust only the misclassified amount and forget the depreciation knock-on.

Revenue expenditure wrongly capitalised (e.g. a repair added to an asset):

The repair was not expensed (profit too high by the full amount), but extra depreciation has been charged on it.
Net profit overstatement = amount − extra depreciation.
The asset is overstated by the same net figure.

Example. A $10,000 repair is added to machinery depreciated at 20%. Extra depreciation = $2,000. Profit overstated = 10,000 − 2,000 = $8,000; machinery overstated = $8,000.

Capital expenditure wrongly expensed (e.g. a machine charged to repairs):

The cost was wrongly expensed (profit too low by the full amount), but no depreciation was charged.
The correct charge is only the depreciation, so net profit understatement = amount − depreciation that should have been charged.

Example. A $10,000 machine is charged to repairs; depreciation should be $2,000. Profit understated = 10,000 − 2,000 = $8,000; the asset should appear at $8,000 (cost less depreciation).

Revenue capitalised: profit overstated = amount − extra depreciation.
Capital expensed: profit understated = amount − depreciation that should apply.
The asset misstatement equals the same net figure.
Forgetting the depreciation knock-on is the classic error.

See the full worked example for effects of incorrect treatment of expenditure & income →

The statement of corrected profit

Start from draft profit and adjust for each error to reach the corrected figure.

When several errors are found, you present a statement of corrected profit: start with the draft (unadjusted) profit, then add items that increase profit and subtract items that decrease it.

Worked layout:

	$
Draft profit	50 000
Add: repair wrongly capitalised — extra depreciation removed...	...
Less: capital wrongly expensed — cost removed from expenses...	...
Corrected profit	X

How to decide add or subtract:

If the error overstated profit, you subtract to correct it.
If the error understated profit, you add to correct it.

Only profit-affecting errors (those touching income or expenses) appear in this statement; pure asset/liability misclassifications (e.g. a wrong customer) do not change profit and are excluded.

Statement of corrected profit = draft profit ± each adjustment.
Overstated profit → subtract; understated profit → add.
Only income/expense-affecting errors appear.
Pure asset/liability errors do not change profit.

See the full worked example for effects of incorrect treatment of expenditure & income →

Quick recap

Misclassifications are errors of principle — the trial balance still balances.
Capital as revenue → profit & net assets down; revenue as capital → up.
Capital receipt as income → profit up; revenue income as capital → profit down.
Allow for knock-on depreciation: net effect = amount − depreciation.
Profit error of $X → net assets change by$ X (profit feeds capital).
Present corrections in a statement of corrected profit (add/less each item).

Memorise this

Verbatim phrases and definitions Cambridge mark schemes credit.

Capital as revenue → profit DOWN; revenue as capital → profit UP.
Net profit effect = misclassified amount − depreciation knock-on.
Profit error of $X changes net assets by$ X.
All capital/revenue misclassifications are errors of principle (TB still balances).

How it’s examined

Tested on Paper 2 and Paper 3: Explain the effect of [error] on profit and net assets and Prepare a statement of corrected profit (commonly 4-8 marks, point-based with OF). Examiner reports stress getting the direction right and remembering the depreciation knock-on.

Sources: Cambridge International AS & A Level Accounting 9706 syllabus (2026-2028); 9706 Paper 2 & Paper 3 past papers & mark schemes, 2022-2024; 9706 Examiner Reports, 2022-2024. Last reviewed 2026-06-17.

Take this whole topic with you

Step-by-step worked examples — Effects of Incorrect Treatment of Expenditure & Income

Step-by-step solutions to past-paper-style questions on effects of incorrect treatment of expenditure & income, written exactly the way a tutor would explain them at the board.

Question type:

1Direction of the profit effect (4 marks)
Getting startedIdentify & classify• 9706 Paper 2 style• effect, AO2
Question
State whether profit is overstated or understated by each error (ignore depreciation): (i) a machine purchase charged to repairs; (ii) a building repair added to the asset; (iii) a loan received recorded as sales; (iv) rent received recorded as capital. (4 marks)
Step-by-step solution
1. Step 1
  (i) Capital as revenue → expenses up → profit understated.
2. Step 2
  (ii) Revenue as capital → expenses down → profit overstated.
3. Step 3
  (iii) Capital receipt as income → income up → profit overstated.
4. Step 4
  (iv) Revenue income as capital → income down → profit understated.
Answer
(i) Understated; (ii) Overstated; (iii) Overstated; (iv) Understated.
Examiner tip
Anything raising expenses or cutting income lowers profit; the reverse raises it.
2Effect ignoring depreciation (4 marks)
Getting startedMulti-step problem• effect, AO2
Question
A $15,000 machine was charged to repairs. Ignoring depreciation, state the effect on profit and on non-current assets. (4 marks)
Step-by-step solution
1. Step 1
  Repairs (expense) overstated by $15,000 → profit understated by $15,000.
2. Step 2
  The machine is missing from assets → non-current assets understated by $15,000.
3. Step 3
  Net assets understated by $15,000 (profit feeds capital).
Answer
Profit understated $15,000; non-current assets understated$ 15,000.
Examiner tip
Capital treated as revenue lowers both profit and assets by the amount.
3Effect with depreciation knock-on (6 marks)
Building confidenceMulti-step problem• depreciation, AO2
Question
A $10,000 repair to machinery was wrongly capitalised. Machinery is depreciated at 20% straight-line on cost. Calculate the effect on (a) profit and (b) the carrying value of machinery. (6 marks)
Step-by-step solution
1. Step 1
  The $10,000 repair should have been an expense → expenses understated by $10,000.
2. Step 2
  But extra depreciation of 20% × 10,000 = $2,000 has been charged.
3. Step 3
  Net effect on expenses = −10,000 + 2,000 = −8,000 → profit overstated by $8,000.
4. Step 4
  Machinery is overstated by 10,000 − 2,000 = $8,000 (cost added less extra depreciation).
Answer
(a) Profit overstated $8,000; (b) machinery overstated$ 8,000.
Examiner tip
Net effect = amount − knock-on depreciation. Forgetting the $2,000 is the classic error.
4Capital wrongly expensed, with depreciation (6 marks)
Building confidenceMulti-step problem• depreciation, AO2
Question
A $24,000 machine was charged entirely to repairs. It should be depreciated at 25% straight-line. Calculate the effect on profit and the value the machine should appear at. (6 marks)
Step-by-step solution
1. Step 1
  Repairs overstated by $24,000 (the whole cost wrongly expensed).
2. Step 2
  But the correct charge is only depreciation = 25% × 24,000 = $6,000.
3. Step 3
  Net effect on expenses = +24,000 − 6,000 = +18,000 too much → profit understated by $18,000.
4. Step 4
  The machine should appear at cost − depreciation = 24,000 − 6,000 = $18,000 (currently missing).
Answer
Profit understated $18,000; machine should appear at$ 18,000 (carrying value).
Examiner tip
Net understatement = cost − the depreciation that should have been charged.
5Statement of corrected profit (6 marks)
StretchMulti-step problem• 9706 Paper 2/3 style• corrected profit, AO2
Question
Draft profit is $80,000. Errors: (a) a$ 12,000 repair was capitalised (depreciation 10%); (b) a $5,000 machine was charged to repairs (depreciation 20%); (c) a$ 3,000 loan received was recorded as sales. Prepare a statement of corrected profit. (6 marks)
Step-by-step solution
1. Step 1
  (a) Repair capitalised → profit overstated by 12,000 − (10% × 12,000 = 1,200) = 8,800 → subtract.
2. Step 2
  (b) Machine expensed → profit understated by 5,000 − (20% × 5,000 = 1,000) = 4,000 → add.
3. Step 3
  (c) Loan as sales → profit overstated by 3,000 → subtract.
4. Step 4
  Corrected profit = 80,000 − 8,800 + 4,000 − 3,000 = $72,200.
Answer
Corrected profit = $72,200.
Examiner tip
Each adjustment is net of depreciation; subtract overstatements, add understatements.
6Effect on net assets (5 marks)
Building confidenceMulti-step problem• net assets, AO2
Question
A $40,000 extension to premises was charged to repairs (no depreciation on premises this year). State the effect on profit and on net assets, and name the type of error. (5 marks)
Step-by-step solution
1. Step 1
  Repairs overstated by $40,000 → profit understated by $40,000.
2. Step 2
  Premises understated by $40,000 → non-current assets understated by $40,000.
3. Step 3
  Net assets understated by $40,000 (the lower profit lowers capital).
4. Step 4
  It is an error of principle; the trial balance still balances.
Answer
Profit understated $40,000; net assets understated$ 40,000; error of principle.
Examiner tip
Capitalising the extension was correct; charging it to repairs understates profit and assets.
7Combined effect of two errors (6 marks)
StretchMulti-step problem• effect, AO2
Question
Draft profit $60,000. (a)$ 8,000 of delivery costs on a new machine were charged to carriage/expenses (depreciation on the machine 10%); (b) $2,500 proceeds from selling an old asset (carrying value$ 2,000) were recorded as sales. Calculate the corrected profit. (6 marks)
Step-by-step solution
1. Step 1
  (a) Delivery is part of the machine's capital cost; it was wrongly expensed. Add back 8,000, but charge extra depreciation 10% × 8,000 = 800 → net +7,200 (add).
2. Step 2
  (b) Only the profit on disposal = 2,500 − 2,000 = 500 is income; $2,500 was recorded → overstated by 2,000 (subtract).
3. Step 3
  Corrected profit = 60,000 + 7,200 − 2,000 = $65,200.
Answer
Corrected profit = $65,200.
Examiner tip
Delivery is capital (add back net of depreciation); only $500 disposal profit is income, so subtract the$ 2,000 excess.
8Why the trial balance still balances (4 marks)
StretchWord problem• error of principle, AO2
Question
A business charged a non-current asset purchase to an expense account. Explain why this error would not be revealed by the trial balance. (4 marks)
Step-by-step solution
1. Step 1
  The transaction was still recorded with a debit and an equal credit (e.g. Dr Repairs, Cr Bank).
2. Step 2
  Total debits still equal total credits, so the trial balance still agrees.
3. Step 3
  The error is in the class of account used (expense instead of asset) — an error of principle.
4. Step 4
  The trial balance only checks arithmetic, not whether the right type of account was used.
Answer
Both entries were made (equal Dr and Cr), so the TB balances; using the wrong class of account is an error of principle that the TB cannot detect.
Examiner tip
Link 'still balances' to the error being one of principle, not arithmetic.
9Corrected profit with several items (7 marks)
StretchMulti-step problem• 9706 Paper 3 style• corrected profit, AO2
Question
Draft profit $95,000. (a)$ 6,000 installation of a new machine was expensed (depreciation 20%); (b) a $4,000 office repair was capitalised into equipment (depreciation 25%); (c)$ 1,500 rent received was recorded as capital introduced; (d) a $9,000 loan received was recorded as sales. Prepare a statement of corrected profit. (7 marks)
Step-by-step solution
1. Step 1
  (a) Installation is capital, wrongly expensed: add 6,000, less extra depreciation 20% × 6,000 = 1,200 → +4,800 (add).
2. Step 2
  (b) Repair capitalised: profit overstated by 4,000 − (25% × 4,000 = 1,000) = 3,000 (subtract).
3. Step 3
  (c) Rent received is income, recorded as capital → income understated → +1,500 (add).
4. Step 4
  (d) Loan as sales → income overstated → 9,000 (subtract).
5. Step 5
  Corrected profit = 95,000 + 4,800 − 3,000 + 1,500 − 9,000 = $89,300.
Answer
Corrected profit = $89,300.
Examiner tip
Four adjustments: installation (add, net of depreciation), repair (subtract, net), rent (add), loan (subtract). Watch each direction.
10Why correct classification matters (6 marks)
StretchWord problem• AO3
Question
Explain why the incorrect treatment of capital and revenue items is a serious problem for the users of financial statements. (6 marks)
Step-by-step solution
1. Step 1
  It misstates profit — overstating or understating it depending on the error.
2. Step 2
  It misstates net assets in the statement of financial position.
3. Step 3
  Because these are errors of principle, the trial balance still balances, so they can go undetected.
4. Step 4
  Users (owners, lenders, investors, tax authorities) rely on the statements to make decisions.
5. Step 5
  Wrong figures could lead to wrong decisions (e.g. lending on an overstated profit) and breach the true and fair view.
6. Step 6
  Deliberate misclassification is also unethical (breaches integrity).
Answer
It misstates profit and net assets, can go undetected (error of principle), misleads users' decisions, breaches the true and fair view, and (if deliberate) is unethical.
Examiner tip
Connect the misstatement to user decisions and the true and fair view for the evaluation marks.

Model Answers — Effects of Incorrect Treatment of Expenditure & Income

High-scoring sample answers for effects of incorrect treatment of expenditure & income on the Cambridge IGCSE paper, with examiner-style notes mapping each response to the mark scheme and assessment objectives.

Question 1
9706 Paper 2 style2 marks
Q (2 marks). State the effect on profit (overstated/understated) of (a) charging the cost of a new vehicle to motor expenses; (b) adding a routine machine repair to the machinery account. Ignore depreciation.
Model answer
(a) Profit understated (an expense is overstated by the cost of the vehicle). (b) Profit overstated (a repair was not expensed).
Why this scores
Marking (point-based, 2). 1 mark each. Capital as revenue understates profit; revenue as capital overstates it.
Question 2
9706 Paper 2 style4 marks
Q (4 marks). A $18,000 machine was charged to repairs. Ignoring depreciation, state the effect on (a) the profit for the year and (b) the non-current assets, and (c) name the type of error.
Model answer
(a) Profit understated by $18,000 (repairs overstated). (b) Non-current assets understated by $18,000 (the machine is missing). (c) An error of principle — the trial balance still balances.
Why this scores
Marking (point-based, 4). Profit understated $18,000 (1), assets understated$ 18,000 (1), net assets understated (1), error of principle (1).
Question 3
9706 Paper 2/3 style5 marks
Q (5 marks). A $14,000 repair was wrongly capitalised by adding it to plant, which is depreciated at 10% straight-line. Calculate the effect on (a) profit and (b) the carrying value of plant.
Model answer
Extra depreciation charged = 10% × 14,000 = $1,400.

(a) Profit. The $14,000 repair was not expensed, but $1,400 extra depreciation was charged, so expenses were understated by 14,000 − 1,400 = $12,600. Profit is overstated by $12,600.

(b) Carrying value of plant. Overstated by 14,000 − 1,400 = $12,600 (the cost added, less the extra depreciation).
Why this scores
Marking (point-based, 5). Extra depreciation $1,400 (1); profit overstated$ 12,600 with working (2); plant overstated $12,600 (2).
Question 4
9706 Paper 2/3 style5 marks
Q (5 marks). A $30,000 machine was charged entirely to repairs. It should have been depreciated at 20% straight-line. Calculate the effect on the profit for the year and state the value at which the machine should appear.
Model answer
Depreciation that should have been charged = 20% × 30,000 = $6,000.

Profit. Repairs were overstated by the full $30,000, but the correct charge is only $6,000 depreciation, so expenses were overstated by 30,000 − 6,000 = $24,000. Profit is understated by $24,000.

Machine value. It should appear at cost − depreciation = 30,000 − 6,000 = $24,000 (it is currently missing from non-current assets).
Why this scores
Marking (point-based, 5). Depreciation $6,000 (1); profit understated$ 24,000 with working (2); machine at $24,000 (2).

Question 5

9706 Paper 3 style7 marks

Q (7 marks). Draft profit is $120,000. Errors found: (a) a$ 10,000 repair was capitalised into machinery (depreciation 20%); (b) $7,000 of installation costs on a new machine were charged to expenses (depreciation 20%); (c) a$ 4,000 loan received was recorded as sales. Prepare a statement of corrected profit.

Model answer

Workings:

(a) Repair capitalised → profit overstated by 10,000 − (20% × 10,000 = 2,000) = 8,000 → Less.
(b) Installation expensed (it is capital) → profit understated by 7,000 − (20% × 7,000 = 1,400) = 5,600 → Add.
(c) Loan as sales → profit overstated by 4,000 → Less.

Statement of corrected profit

	$
Draft profit	120 000
Add: installation wrongly expensed (net of depreciation)	5 600
Less: repair wrongly capitalised (net of depreciation)	(8 000)
Less: loan received recorded as sales	(4 000)
Corrected profit	113 600

Why this scores

Marking (point-based, 7). Each adjustment net of depreciation and in the right direction (2+2+1); correct layout (1); corrected profit $113,600 OF (1).

Question 6
9706 Paper 3 style6 marks
Q (6 marks). Draft profit is $50,000. A business recorded the$ 9,000 proceeds of selling a vehicle (carrying value $6,500) as sales, and charged$ 3,000 of legal fees on buying new premises to legal expenses. Premises are not depreciated in the year of purchase. Calculate the corrected profit.
Model answer
Workings:

Vehicle: only the profit on disposal = 9,000 − 6,500 = 2,500 is income; $9,000 was recorded, so profit is overstated by 6,500 → Less.

Legal fees on buying premises are capital (cost of acquiring the asset), wrongly expensed → profit understated by 3,000 → Add (no depreciation this year).

Statement of corrected profit

$
Draft profit 50 000
Add: legal fees wrongly expensed (capital) 3 000
Less: excess of vehicle proceeds over disposal profit (6 500)
Corrected profit 46 500
Why this scores
Marking (point-based, 6). Disposal profit $2,500 / excess$ 6,500 (2); legal fees are capital, add $3,000 (2); layout (1); corrected profit$ 46,500 OF (1).
Question 7
9706 Paper 2 style4 marks
Q (4 marks). Explain why the incorrect treatment of capital and revenue expenditure is not revealed by the trial balance.
Model answer
Such an error is an error of principle — the transaction is recorded in the wrong class of account (e.g. Dr Repairs instead of Dr Machinery), but a debit and an equal credit are still made.

Because total debits still equal total credits, the trial balance still agrees. The trial balance only checks the arithmetical accuracy of the double entry, not whether the correct type of account was used, so it cannot detect the misclassification.
Why this scores
Marking (point-based, 4). Error of principle / wrong class of account (~2); equal Dr and Cr so TB balances / TB checks only arithmetic (~2).
Question 8
9706 Paper 2/3 style5 marks
Q (5 marks). Explain why an error that overstates the profit for the year by $7,000 also overstates the net assets in the statement of financial position by$ 7,000.
Model answer
Profit for the year is added to capital at the year end (closing capital = opening capital + profit − drawings). If profit is overstated by $7,000, then closing capital is overstated by $7,000.

Since net assets always equal capital (Assets − Liabilities = Capital), the net assets shown in the statement of financial position are also overstated by $7,000. So a profit error feeds directly into the statement of financial position by the same amount.
Why this scores
Marking (point-based, 5). Profit added to capital (~2); capital overstated $7,000 (~1.5); net assets = capital, so overstated$ 7,000 (~1.5).
Question 9
9706 Paper 3 evaluation style6 marks
Q (6 marks). Discuss the importance to the users of financial statements of the correct treatment of capital and revenue items.
Model answer
Effect on the statements. Misclassifying capital and revenue items misstates the profit (overstated or understated) and misstates net assets, so both the statement of profit or loss and the statement of financial position are wrong.

Why this is serious.

These are errors of principle, so the trial balance still balances and the error can go undetected.

Users — owners, lenders, investors and tax authorities — rely on the statements to make decisions (e.g. whether to lend, invest or how much tax is due).

Wrong figures can lead to poor decisions, such as a bank lending against an overstated profit.

Concepts and ethics. Correct treatment upholds the matching concept and gives a true and fair view; deliberate misclassification breaches prudence and the principle of integrity (3.2), which is unethical.

Conclusion. Correct classification is essential for the reliability and credibility of the financial statements and the decisions based on them; even unintentional errors should be found and corrected.
Why this scores
Marking (point-based, ~6). Misstatement of profit and net assets (~2); undetected error of principle + user decisions (~2); concepts/ethics/true and fair view (~1); supported conclusion (~1).
Question 10
9706 Paper 3 style6 marks
Q (6 marks). Draft profit is $72,000. (a)$ 5,000 of carriage on a newly purchased machine was charged to carriage inwards (the machine is depreciated at 10%); (b) commission received of $2,000 was recorded as capital introduced. Calculate the corrected profit, showing your workings.
Model answer
Workings:

(a) Carriage on the machine is part of its capital cost, wrongly charged to carriage inwards (an expense). Add back $5,000, less extra depreciation 10% × 5,000 = 500 → net +4,500 (Add).

(b) Commission received is revenue income, recorded as capital → income understated → +2,000 (Add).

Statement of corrected profit

$
Draft profit 72 000
Add: carriage on machine wrongly expensed (net of depreciation) 4 500
Add: commission received recorded as capital 2 000
Corrected profit 78 500
Why this scores
Marking (point-based, 6). Carriage on machine is capital, add net of depreciation $4,500 (3); commission is income, add$ 2,000 (2); corrected profit $78,500 OF (1).

	$
Draft profit	72 000
Add: carriage on machine wrongly expensed (net of depreciation)	4 500
Add: commission received recorded as capital	2 000
Corrected profit	78 500

Key Definitions and Keywords — Effects of Incorrect Treatment of Expenditure & Income

Definitions to memorise and the exact keywords mark schemes credit for effects of incorrect treatment of expenditure & income answers — sharpened from recent examiner reports for the 2026 Cambridge IGCSE sitting.

Error of principle
Examiner keyword
Recording an item in the wrong class of account (e.g. capital expenditure as revenue); the trial balance still balances.
Overstated / understated
Examiner keyword
Shown as higher (overstated) or lower (understated) than the correct amount; used to describe the effect of an error on profit or net assets.
Depreciation knock-on
Examiner keyword
The change in depreciation that follows from wrongly capitalising or expensing expenditure; the net profit effect = amount − knock-on depreciation.
Statement of corrected profit
Examiner keyword
A statement that starts from draft profit and adds/subtracts each profit-affecting correction to reach the corrected profit.
Net assets effect
Because profit feeds capital, a profit error of $X changes net assets by$ X in the same direction.
Carrying value
Cost of a non-current asset less accumulated depreciation; the value at which a wrongly-treated asset should appear after correction.

Common Mistakes and Misconceptions — Effects of Incorrect Treatment of Expenditure & Income

The traps other students keep falling into on effects of incorrect treatment of expenditure & income questions — taken from recent Cambridge IGCSE examiner reports and mark schemes — and how to avoid them.

✕Forgetting the depreciation knock-on
9706 Examiner Reports
Why it happens
Adjusting only the misclassified amount.
How to avoid it
Net profit effect = misclassified amount − the related depreciation. Always check whether a depreciation rate is given.
✕Getting the direction (over/understated) wrong
9706 Examiner Reports
Why it happens
Not tracing through expenses/income.
How to avoid it
Raising expenses or cutting income → profit DOWN. Cutting expenses or raising income → profit UP.
✕Adding when you should subtract in the corrected-profit statement
9706 Examiner Reports
Why it happens
Confusing the error with its correction.
How to avoid it
If the error OVERSTATED profit, SUBTRACT to correct; if it UNDERSTATED profit, ADD.
✕Treating full asset proceeds (not just the disposal profit) as income
9706 Examiner Reports
Why it happens
Carrying over from the income subtopic.
How to avoid it
Only the profit/loss on disposal is income; the excess recorded as sales overstates profit by the carrying value.
✕Including pure asset/liability errors in the corrected-profit statement
9706 Examiner Reports
Why it happens
Adjusting every error found.
How to avoid it
Only income/expense-affecting errors change profit. A wrong customer or misposted bank balance does not.
✕Thinking the trial balance would reveal these errors
9706 Examiner Reports
Why it happens
Assuming a balanced TB is error-free.
How to avoid it
These are errors of principle — both entries are made, so the TB still balances and does not detect them.

	$
Draft profit	50 000
Add: legal fees wrongly expensed (capital)	3 000
Less: excess of vehicle proceeds over disposal profit	(6 500)
Corrected profit	46 500

Effects of Incorrect Treatment of Expenditure & Income

Detailed Study Notes

At a glance

What you’ll learn

Quick recap

Memorise this

How it’s examined

Take this whole topic with you

1Direction of the profit effect (4 marks)

2Effect ignoring depreciation (4 marks)

3Effect with depreciation knock-on (6 marks)

4Capital wrongly expensed, with depreciation (6 marks)

5Statement of corrected profit (6 marks)

6Effect on net assets (5 marks)

7Combined effect of two errors (6 marks)

8Why the trial balance still balances (4 marks)

9Corrected profit with several items (7 marks)

10Why correct classification matters (6 marks)

Error of principle

Overstated / understated

Depreciation knock-on

Statement of corrected profit

Net assets effect

Carrying value

✕Forgetting the depreciation knock-on

✕Getting the direction (over/understated) wrong

✕Adding when you should subtract in the corrected-profit statement

✕Treating full asset proceeds (not just the disposal profit) as income

✕Including pure asset/liability errors in the corrected-profit statement

✕Thinking the trial balance would reveal these errors