In order to understate net income, therefore lowering income tax liability, an accountant could fraudulently expense costs rather than properly capitalizing them to an asset account.

In order to understate net income, therefore lowering income tax liability, an accountant could fraudulently expense costs rather than properly capitalizing them to an asset account.

• A. True
• B. False
• C. Not possible
• D. Sometimes

Answer: (A)

Shifting a cost that should be capitalized into an expense lowers the current period’s net income. Since taxes are based on taxable income, taking a larger expense now also reduces the amount of tax owed in that period. While depreciation or amortization would defer the cost over future periods if the item were capitalized, expensing it upfront reduces reported earnings and tax liability in the present. If someone does this fraudulently to manipulate results or taxes, it violates accounting rules, but the effect described—understating net income and lowering tax liability—is real.

Shifting a cost that should be capitalized into an expense lowers the current period’s net income. Since taxes are based on taxable income, taking a larger expense now also reduces the amount of tax owed in that period. While depreciation or amortization would defer the cost over future periods if the item were capitalized, expensing it upfront reduces reported earnings and tax liability in the present. If someone does this fraudulently to manipulate results or taxes, it violates accounting rules, but the effect described—understating net income and lowering tax liability—is real.