Question

When a person who is maintaining accounts is not able to differentiate between capital expenditure and revenue expenditure, it is a/an ______________.

• A. error of principle
• B. error of omission
• C. error of commission
• D. all of the above

Answer 1

The correct option is A error of principle

Error of principle - When a transaction is recorded in contravention of accounting principle, it is known as an error of principle. Such errors do not affect the trial balance as amounts are placed on the correct side but in a wrong account. An example of such error is treating the purchase of an asset and/or other amounts spent such as freight, etc. on its acquisition as revenue expenditure instead of as a capital expenditure. The effect of such a treatment is that the financial results gets distorted but the trial balance will agree.