Error Of Principle

Error Of Principle
See also
Purchase account Contra entry Purchase ledger Purchases journal Cost principle Compound journal entry Sales ledger Cash Transaction Customer deposits

Error Of Principle - is one of the types of error appears when a registration for the appropriate amount is occurred on the appropriate side, but to the improper class of account. A transaction can be entered into a right account when it ought to be entered into a nominal account. This is contrary with an elementary rules of book-keeping. The most popular of this errors appears, when the buying or selling of an asset is considered as the buying or selling of goods for resale (Thompson Hosein, 2004, pp. 108-110).

Examples Errors Of Principle

Two examples of occurring Errors Of Principle are presented below:

• A typewriter was purchased from Business Supplies Ltd credit on 21 March. Purchases were debited and credited Business Supplies Ltd by the book-keeper. This error will not appeal to the agreement of the trial balance, for a debit entry has been caused with an analogous credit entry. Nonetheless, an error of principle has been caused because of the book-keeping's state rules that every time an asset is bought, the asset account which is a genuine account has to be debited along with the cost of the asset. A nominal account like the purchases account is applied only if items are bought for resale, or if raw materials are bought for using into the manufacture of goods (Whittington, 2012, p. 113).
• Another general error of principle appears when the selling of an asset is considered as the selling of goods. A credit entry is caused into the selling account instead of into the asset account. An old typewriter assess the value of the books at $350 and sold at that amount to A. Melville and he paid for it by cheque. The bank account was debited but the sales account was credited by the book-keeper. Even though the trial balance will still stability, an error of principle has been caused, because the genuine asset account should be credited every time when as asset is sold. A nominal account which is the sales account is only applied when goods are sold (Waddams, 2012, pp. 123-125).

Causes occurring Errors Of Principle

Errors can stem from (Mukherjee, Hanif, 2010, pp. 18-20):

• An inappropriate use of an accounting principle or technique;
• The use of wrong accounting principle;
• The failure to use the essential accounting principle.

Types of Errors

Errors, in the books of account, could be classify into two main types (Monte- Galanza, 2006, pp. 138-140):

• Accounting errors – these errors could be intentional or unintentional and could be divided into three classes:

1. Errors of principle;
2. Errors of omission;
3. Error of commission.

• Systems errors – these errors are deficiencies in the inner control system and are categorized into:

1. Compliance errors;
2. Systems design error.

Advantages of Error Of Principle recognition

Error of principle has several advantages. Firstly, it helps to correctly identify and recognize mistakes in the accounts. Secondly, it helps to identify if there has been an improper use of funds or resources. Thirdly, it helps to detect any discrepancies in the accounts and to prevent further losses. Fourthly, it helps to identify and correct any accounting errors that may have been made. Finally, this type of error can be easily rectified with minimal disruption to the business and its accounts.

Limitations of Error Of Principle

• Error of principle may lead to inaccurate financial records and inaccurate reporting. This can cause confusion for the management, as well as for the outside stakeholders and auditors.
• Error of principle can have a negative effect on the company’s reputation, as it is a clear indication of a lack of managerial oversight.
• Error of principle can lead to significant financial losses for the company if the mistake is not detected and corrected in a timely manner.
• Error of principle can create a hostile work environment if employees are held accountable for mistakes that were due to errors of principle.
• Error of principle can lead to legal action against the company if the mistake is deemed material by the regulators.

Other approaches related to Error Of Principle

One approach to Error Of Principle is to make sure to adhere to the fundamental principles of accounting. This includes:

• Ensuring that all transactions are recorded accurately on the correct side of the ledger, and that the correct account is used.
• Making sure that all transactions are documented fully, with supporting documentation such as receipts and invoices.
• Ensuring that all capital investments are accurately recorded and that the resulting depreciation is accounted for.
• Double-checking all entries for any errors or inconsistencies.

By following these principles, it is possible to avoid making costly errors of principle. Additionally, it is important to ensure that all accounting staff are properly trained in the fundamentals of accounting and that periodic reviews are conducted to ensure that all staff are following the correct procedures. In summary, careful adherence to the fundamental principles of accounting will help to avoid errors of principle.

References

• Monte- Galanza R., (2006), A procedural Approach to Auditing Principles, REX Book Store, pp. 138-140.
• Mukherjee A., Hanif M., (2010), Modern Accountancy, Tata McGraw-Hill, Vol I, pp. 18-20.
• Thompson Hosein F., (2004), Principles of Accounts, Heinemann, pp. 108-110.
• Waddams S., (2012), Principle and Policy in Contract Law: Competing or Complementary Concepts?, Cambridge University Press, pp. 123-125.
• Whittington O., Delaney P., (2012), Wiley CPA Examination Review, CPA, Vol I, p. 113.

Author: Patrycja Wojcik