Give two examples of errors of principle?
Errors of principle occur when accounting entries violate generally accepted accounting principles, primarily due to the incorrect classification of expenditure or receipt between capital and revenue. These errors affect the financial statements by causing an under-statement or over-statement of income, assets, or liabilities.
Two examples of errors of principle are:
- Treating amount spent on additions to buildings (a capital expenditure) as a revenue expense by debiting it to the maintenance and repairs account.
- Recording the credit purchase of machinery in the purchases book instead of the journal proper, thereby confusing a capital asset with a routine purchase.
Explanation
The answer is derived directly from section 6.4.4 of the provided text. The text defines errors of principle as violations of accounting principles, specifically the misclassification between capital and revenue. The first example is explicitly stated in the text: debiting 'maintenance and repairs' for 'additions to buildings'. The second example is also directly taken from the text: recording 'credit purchase of machinery' in the 'purchases book'. Both examples illustrate the confusion between capital items (building, machinery) and revenue items (repairs, purchases).