Misclassifying expenses occurs when a business incorrectly categorizes its spending in financial records. This can lead to inaccurate financial statements, affecting budgeting, tax reporting, and overall financial analysis. For example, if a company mistakenly records a marketing expense as a research and development expense, it can distort the true nature of its spending. Such errors can result from a lack of understanding of accounting principles or insufficient training for staff. Misclassifying expenses can also complicate audits and financial reviews, potentially leading to penalties or fines from tax authorities like the IRS. Accurate classification is essential for effective financial management.