Errors of Principle
Errors of Principle: Definition
Errors of principle arise due to a bookkeeper’s or an accountant’s improper understanding of accounting and its core principles.
These errors resemble errors of commission except in one respect: errors of commission usually lead to oversight whereas errors of principle are 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 purchasing fixed assets, whereas revenue expenditure is incurred in the day to day running of the business.
For example, the purchase of a motor car is a capital expenditure while the purchase of fuel for the car is revenue expenditure.
Effect on Accounts
As with errors of commission, errors of principle have the following effects on accounts:
- 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
Rectification entries for errors of principle are the same as rectification entries for errors of commission. That is to say, 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 incorrectly debited
If an irrelevant account has been credited instead of the correct account:
- Debit the account that has been incorrectly credited.
- Credit the account that should have been credited.
Some furniture was bought on credit for $2,500 for office use. It was debited to the purchases account. (This means that a capital expenditure is being treated as revenue expenditure.)
Rent received from a tenant, $4,500, was credited to a premises account. (This means that a revenue receipt is being treated as a capital receipt.)
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.