Errors of principle

Definition and explanation

Errors of principle, as the name implies, mean accounting errors that happen when a bookkeeper or accountant ignores one or more of the fundamental principles of accounting. These errors usually occur when:

1. a revenue expenditure is recorded as the capital expenditure, and vice versa.
2. an insufficient depreciation is provided on a noncurrent asset owned by the business.
3. an inadequate provision is created on doubtful accounts.

In an error of principle, the transaction is posted in the debit or credit of a wrong account instead of the account in which it should have been posted. Errors of principle seem very similar to errors of commission, but they are different in that the former arise due to an improper understanding of basic accounting principles, while the latter occur due to negligence or oversight.

Let’s take an example to understand how an error of principle arises in the books of accounts. Suppose an amount spent on the repair of a building is wrongly debited to the building account instead of the repair account. It means that an expense, instead of being recorded in the right account, has been recorded in the wrong account of a different class. The repair and maintenance cost is a revenue expense by nature, and therefore it should be recorded in the repair account. However, it has been wrongly recorded in the building account, treating it as a capital expenditure. Read more from the capital and revenue expenditures article.

The repair account is an expense account and the building account is an asset account. Since the two accounts belong to different classes, this is an error of principle. This error will not disturb the agreement of the trial balance because there is no mistake in the amount of its debit and credit columns.

Rectification of errors of principle

When an error of principle is discovered, it is rectified in one of the following ways:

If the transaction has been debited to a wrong account:

• Debit the right account, i.e., the account that should have been debited.
• Credit the wrong account, i.e., the account that has been mistakenly debited. It will cancel the impact of the wrong debit.

If the transaction has been credited to a wrong account:

• Debit the wrong account i.e., the account that has been mistakenly credited. It will cancel the impact of the wrong credit.
• Credit the right account, i.e., the account that should have been credited.

Examples

Let’s exemplify some errors of principle and journal entries to rectify them.

Example 1 – the treatment of a capital expenditure as a revenue expenditure

Moon Inc. purchased a piece of equipment on credit for $650 to be used in the storekeeper’s office. The amount was mistakenly debited to purchases account.

This is an error of principle because a capital expenditure has been wrongly recorded as a revenue expenditure. It can be rectified by debiting the equipment account and crediting the purchases account as follows:

Example 2 – the treatment of a revenue receipt as a capital receipt

A rental income amounting to $1,500 received from the tenant company was credited to the building account.

In this case, a revenue receipt of $1,500 has been wrongly recorded as a capital receipt. This is also an error of principle and can be rectified by debiting the building account and crediting the rental income account as follows: