What happens to net income if expenses are incorrectly recorded as assets?

When expenses are incorrectly recorded as assets, it leads to a situation where the expenses are not being recognized in the income statement. Since expenses reduce net income, failing to record them properly results in net income appearing higher than it actually is.

For instance, if a business incurs a cost that should have decreased profits, such as a repair expense, but instead categorizes it as an asset, this expense will not be reflected in the income statement. Consequently, because the expense is not deducted from revenue, net income will increase. This misrepresentation can create a misleading view of the company’s profitability and financial health.

Therefore, understanding that expenses lower net income is crucial, and when they are misclassified as assets, it artificially inflates the net income figure.