In accounting, what is the result of using an incorrect accounting principle?

Using an incorrect accounting principle can lead to significant misrepresentations in financial statements, and one of the critical effects is the expensing of a capital purchase. When a capital purchase, such as equipment or property, is improperly expensed instead of being capitalized, it results in an immediate and incorrect reduction in net income on the income statement.

By expensing the purchase immediately, a business fails to recognize the long-term benefit of the asset, as capital assets are meant to provide utility over multiple periods. Instead, they should be depreciated over their useful life. As a result, this misapplication of accounting principles skews the financial analysis and presents a misleading picture of profitability and asset management to stakeholders.

Overall, the ramifications of expensing a capital purchase affect not only the current financial statements but also future reporting periods, leading to possible decision-making errors by management and external users of the financial statements.