If an expense is recorded incorrectly as an asset, what type of impact could this have?

When an expense is incorrectly recorded as an asset, both the balance sheet and the income statement are impacted. On the balance sheet, this error will result in an overstatement of assets because the expense, which should have reduced net income, is incorrectly classified as an asset. This means that the value of the assets reported is higher than it should be.

On the income statement, the misclassification of the expense means that expenses reported are understated. Because expenses are not recognized as they should be, the net income appears higher than it actually is, leading to a distorted view of the company's profitability.

Thus, the interaction between the balance sheet and income statement due to this type of error creates a chain reaction that affects both statements, illustrating the interconnectedness of accounting records. Properly recording expenses is crucial for maintaining accurate financial information and ensuring stakeholders are not misled.