Errors of Principle

Errors of Principle

Accounting entries must follow the generally accepted accounting principles (GAAP). When a transaction is recorded in a way that violates or ignores these fundamental principles, the mistake is called an error of principle.

The most common form of this error is the incorrect classification of expenditure or receipt between capital and revenue. This distinction is critical because it directly affects the financial statements — it can lead to the understatement or overstatement of income, assets, or liabilities.

For example, money spent on adding to a building is a capital expenditure. It should be debited to the asset account (Building Account). If instead it is debited to the Maintenance and Repairs Account (a revenue expense), that is an error of principle. The nature of the expense has been misclassified.

Similarly, if a credit purchase of machinery is recorded in the Purchases Book instead of the Journal Proper, or if rent paid to the landlord is recorded in the Cash Book as a payment to the landlord (without recognising it as rent expense), these are also errors of principle. …