Question -
Answer -
When recording oftransactions in the original book of entry is done against the accountingprinciple, it leads to errors which are known as Errors of principle. Theseerrors are not reflected in the Trial Balance. These errors arecommitted when there is no proper distinction between capital expenditure andrevenue expenditure, or vice versa or between capital income and revenue incomeor vice versa.
The following exampleswill help with the process of understanding and rectification of such errors.
Let us consider firstexample. Wages paid for construction of building are debited to Wages Account.
Wrong entry made is:
| Wages A/c | Dr. |
| To Cash A/c | |
| ( Wages paid in cash) | |
| | |
In this case, Wages ispaid for the construction of building which is a capital asset and hence itshould be treated as a capital expenditure and by rule should be debited to thebuilding account. But, the Wages Account is wrongly debited.
Thus, the correctentry that should have been made is:
| Building A/c | Dr. |
| To Cash A/c | |
| (Wages paid for construction of building) | |
| | |
In order to rectifythis error, the entry for rectification should be:
| Building A/c | Dr. |
| To Wages A/c | |
| (Wages paid for construction of building was debited to Wages Account, now rectified) | |
| | |
The second example oferrors of principle is the sale of old machinery recorded as sales.
Wrong entry made:
| Cash A/c | Dr. |
| To Sales A/c | |
| (Sales of old machinery, recorded as sales) | |
| | |
In the above case, thesale of old machinery should not be recorded as sales; in fact theMachinery Account should be credited. Thus, the correct entry that should havebeen made is:
| Cash A/c | Dr. |
| To Machinery A/c | |
| (Old machinery sold for cash) | |
| |
| | |
The error can berectified in the following manner: Sales Account will be debited, as it iswrongly credited and machinery will be credited, as it will not berecorded in the books. Thus, the rectifying entry will be:
| Sales A/c | | Dr. |
| To Machinery A/c | | |
| (Sale of old machinery recorded as sales, now rectified) |