Q.What are Compensating Errors ?

Debiting installation wages to Wages A/c instead of Machinery A/c is an error of principle — option (b).

What is an error of principle?

• It occurs when a transaction is recorded in violation of an accounting principle — most commonly by mixing up capital and revenue items.
• Wages paid for installation of machinery are a capital expenditure — they add to the cost of bringing the machinery into working condition, so they should be debited to Machinery A/c.
• Debiting them instead to Wages A/c (a revenue expense) wrongly treats a capital item as revenue. This is an error of principle.

Why not the others? …

Errors of principle do not affect the agreement of the trial balance, so the answer is (b).

Some errors leave the trial balance in agreement because the debit and credit totals stay equal:

• Errors of principle — a transaction is recorded against accounting principles (e.g. purchase of an asset debited to an expense account), but an equal debit and credit are still posted, so the totals agree.
• Errors of complete omission and compensating errors also do not affect agreement. …

Debiting installation wages to Wages A/c instead of Machinery A/c wrongly treats capital expenditure as revenue expenditure — an error of principle (option d).

Reasoning:

• Wages paid to install machinery are part of the cost of bringing the asset to working condition, so they are capital expenditure and should be debited to the Machinery account.
• Debiting them to the ordinary Wages account treats them as a revenue expense — this breaks the rule for distinguishing capital and revenue items, i.e. a fundamental accounting principle. …