Question

Write a note on the error of principle by giving an example.

Answer 1

It means the mistake committed in the application of fundamental accounting principles in recording a transaction in the books of accounts.

The following are the possibilities of error of principle:

1. Entering the purchase of an asset in the purchases book-
   Example: Machinery purchased on credit for ₹ 10,000 by M/s. Anbarasi garments manufacturing company entered in the purchases book.
2. Entering the sale of an asset in the sales book-
   Example: Sale of old furniture on credit for ₹ 500 was entered in the sales book.
   
3. Treating a capital expenditure as a revenue expenditure-
   Examples: An amount of ₹ 3,000 spent on the construction of an additional room is debited to the repairs account. Wages of ₹ 600 paid for the installation of a new machine are debited to the wages account.
   
4. Treating a revenue expenditure as a capital expenditure-
   Example: An amount of ₹ 2,000 paid for repairs to a machine is debited to the machinery account.