Errors of principle – Definition
Errors of principle are caused due to a book-keeper’s or an accountant’s ignorance or improper understanding of principles of accounting.
This error resembles error of commission, except in one respect. Errors of commission usually result in an oversight whereas an error of principle is caused by a lack of knowledge of accounting principles. The common error is the treatment of capital expenditure as revenue expenditure or vice versa. Capital expenditure is expenditure on purchase of fixed assets whereas revenue expenditure is incurred on day to day running of the business. Thus the purchase of a motor car is a Capital Expenditure while the purchase of fuel for the car is revenue expenditure.
Effect on accounts
The same as for errors of commission, i.e.
- Either the correct account will not be debited and an irrelevant account will be debited, or
- The correct account will not be credited and an irrelevant account will be credited.
Errors of Principle – Rectification entry
Also the same as for errors of commission, i.e.
If an irrelevant account has been debited instead of the correct account:
- Debit the account that should have been debited.
- Credit the account that has been erroneously debited.
If an irrelevant account has been credited, instead of the correct account:
- Debit the account that has been erroneously credited.
- Credit the account that should have been credited.
Some furniture was bought on credit for $2,500 to be used in the office. It was debited to purchases account. (This means a capital expenditure is being treated as revenue expenditure.)
Rent received from a tenant, $4,500, was credited to premises account, (This means a revenue receipt is being treated as a capital receipt.)