L3U2 - Non-current/current assets - help required please!!

pauldbaker95
pauldbaker95 Registered Posts: 13 New contributor 🐸
edited July 24 in Financial Accounting: Preparing Financial Statements
Hi all,

I am currently revising L3U2 and performing the activities using the Osbourne books. There is a question as follows:

"A non-current asset has been wrongly classified as a current asset. What is the effect on the following items in the financial statements?"

Net profit, current assets, current liabilities, non-current assets.

The options are: 'understated', 'overstated' and 'no effect'.

I checked my answers and the only one I got wrong was Net profit. I wrote down that the net profit would be overstated if a non-current asset had been classified as a current asset. I chose this option as I understood non-current assets are subject to depreciation charges which lowers the profit for the year through the P&L section of the extended trial balance. I thought logically, if a non-current asset was classed as a current asset, it would not record the depreciation charge, and therefore show a higher profit than actually correct?

Not sure if I have worded that in an understandable way, but would appreciate someone explaining. The correct answer apparently is 'no effect' but I don't understand why.

Many thanks in advance.

Comments

  • davealucas
    davealucas Registered Posts: 156 Dedicated contributor 🦉
    @pauldbaker95 There would be no effect on the net profit for the very reason that you mentioned in your question above; "it would not record the depreciation charge". You have effectively answered your own question.

    I do understand where you are coming from, but you wouldn't retrospectively record a depreciation charge into a previous financial year, unless you are doing it as part of a fiscal closedown process.
  • pauldbaker95
    pauldbaker95 Registered Posts: 13 New contributor 🐸
    davealucas said:

    @pauldbaker95 There would be no effect on the net profit for the very reason that you mentioned in your question above; "it would not record the depreciation charge". You have effectively answered your own question.

    I do understand where you are coming from, but you wouldn't retrospectively record a depreciation charge into a previous financial year, unless you are doing it as part of a fiscal closedown process.

    Ah I see, I think that makes sense. Thank you for your help, I appreciate you replying!

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