Errors of principle occur when accounting entries are recorded violating the generally accepted accounting principles. These errors arise due to the wrong classification of receipts and payments between revenue and capital receipts or expenditures, rather than errors in calculation or recording.

These errors are significant because they impact the financial statements. They may lead to under-stating or over-stating of income, assets, or liabilities, which misrepresents the true financial position of the business.

Example 1: Amount spent on additions to buildings is a capital expenditure and must be debited to the asset account. If this amount is wrongly debited to the maintenance and repairs account (a revenue expense), it is an error of principle.

Example 2: If a credit purchase of machinery (a capital asset) is recorded in the purchases book (meant for trading goods) instead of the journal proper, it violates the distinction between capital and revenue purchases.

Rectification Measures: To rectify these errors, the process involves cancelling the effect of the wrong debit or credit by reversing it and restoring the effect of the correct debit or credit. This is achieved by passing a rectification journal entry that debits the account with a short debit or excess credit and credits the account with an excess debit or short credit.