Error of principle
What is an error of principle?
An error of principle is an entry in the wrong kind of account, such as an asset recorded as an expense.
The debit and the credit are equal, so the trial balance agrees.
In an error of commission the two accounts are the same kind. In an error of principle they are different kinds.
Example
A garage pays £1,800.00 for a new car lift, and Repairs is debited by mistake. The lift is an asset. To correct it, Equipment is debited with £1,800.00 and Repairs is credited with £1,800.00.
Why it matters
It changes the profit. An asset recorded as an expense makes expenses too high and assets too low.
Practise it
Module, 5 rooms, PremiumErrors the trial balance hides
See the first roomPosted to the wrong kind of account
Ledger Drill is practice, not tax or accounting advice. If this looks wrong, tell us at [email protected].