Question

Explain errors of principle and give two examples with measures to rectify them.

Answer 1

Errors of Principle refer to those errors that are committed when recording of transactions in the original book of entry is done against the accounting principle. These errors are not reflected in the Trial Balance. These errors are committed when proper distinction is not made between capital expenditure and revenue expenditure, or vice versa or between capital income and revenue income or vice versa.

The following examples will illustrate the process of understanding and rectification of such errors.

Let us consider first example. Wages paid for construction of building are debited to Wages Account.

Wrong entry made is:

Wages A/c		Dr.
	To Cash A/c
( Wages paid in cash)

In this case, Wages paid for the construction of building should be treated as a capital expenditure and accordingly should be debited to the building account. However, the Wages Account is wrongly debited. Thus,

the correct entry that should have been made is:

Building A/c		Dr.
	To Cash A/c
(Wages paid for construction of building)

In order to rectify this error, the rectifying entry should be:

Building A/c		Dr.
	To Wages A/c
(Wages paid for construction of building was debited to Wages Account, now rectified)

The second example of errors of principle is the sale of old machinery recorded as sales.

Wrong entry made:

Cash A/c		Dr.
	To Sales A/c
(Sales of old machinery, recorded as sales)

In this case, the sale of old machinery should not be recorded as sales; in fact the Machinery Account should be credited. Thus, the correct entry that should have been made is:

Cash A/c		Dr.
	To Machinery A/c
(Old machinery sold for cash)

In order to rectify this error, Sales Account will be debited, as it is wrongly credited and machinery will be credited, as it will not be recorded in the books. Thus, the rectifying entry will be:

Sales A/c		Dr.
	To Machinery A/c
(Sale of old machinery recorded as sales, now rectified)