Definition Definition

What Is Errors of Principle? Common Error of Principles with Examples

What is Error of Principle?

Errors of principles refer to errors arising when the entries are not recorded according to the fundamental principles of accountancy, e.g., wrong allocation of expenditure between capital and revenue, ignoring the outstanding assets and liabilities, and valuation of assets against the principles of bookkeeping.

Definition 2

Errors of principles in accounting refer to mistakes made in the application of accounting principles, which can result in inaccurate financial statements. 

More Thorough Understanding of the Term

It is critical to have a strong understanding of accounting principles as a business owner or accounting professional. Accounting principles serve as the framework for preparing financial statements. It is easy to create errors that can impact the accuracy and integrity of financial accounts if these concepts are not adequately understood.

Such errors may be committed either intentionally or unintentionally. If they are committed intentionally, the object is to falsify and manipulate the accounts to show more profit or less profit than they actually are. Such errors affect the balance sheet.

Therefore, an auditor needs to pay particular attention to this type of error. Such an error is not disclosed by the trial balance or routine checking. It can be detected only by searching inquiry and independent checking.

Common Error of Principles

Errors of principles can occur when the principles need to be applied correctly, resulting in financial statements that do not reflect the true financial position of a business. Some common errors of principles in accounting include:

Matching Principle Error

The matching concept is a fundamental accounting principle. This principle dictates that expenses be proportionate to the money generated. An error can arise when expenses are reported at a different period than the money generated. 

This can result in erroneous financial statements since expenses must be accurately matched with the money generated.

To avoid making this mistake, ensure all expenses are recorded in the same period as the revenue. Pre-paid expenses should be reported as assets and expensed over the period they benefit the business.

Revenue Recognition Error

The revenue recognition principle is another important accounting principle. According to this principle, revenue must be recognized when earned, regardless of when payment is received. An error can arise when income is recognized before or after it is earned.

To avoid making this mistake, make sure that money is recognized when it is earned. This means that all revenue made during a period must be recognized, even if payment has not yet to be received.

Going Concern Error

The going concern principle believes that the company will continue to exist indefinitely. An error can occur when the going concern concept is not implemented correctly. This can result in erroneous financial statements since a company's assets and liabilities must be appropriately documented.

To avoid making this mistake, ensure the going concern principle is correctly implemented to avoid making this mistake. This means that all assets and liabilities should be recorded at their fair value, assuming that the company would continue to operate indefinitely.

Consistency Error

According to the consistency principle, accounting methods employed in one period must be utilized consistently in subsequent periods. When accounting procedures are altered without rationale, a mistake can result. This can lead to erroneous financial statements because comparing financial statements between periods is difficult.

To avoid this mistake, ensure that accounting systems are applied consistently from one period to the next. If a change is required, it must be justified and stated in the financial accounts.

Materiality Error

According to the materiality principle, only essential items must be recorded in financial accounts. A mistake can arise when small things are recorded, resulting in cluttered financial statements and possible misinterpretation.

To avoid this issue, only report major things in financial statements. This indicates that immaterial objects can be excluded.


Example 1: Matching Principle Error

A corporation receives a $5,000 order in December and delivers it in January of the following year. However, the revenue is recorded in December, when the order was received, rather than January, when the products were delivered. As a result, the matching expenses and revenue need to be corrected, resulting in false financial statements.

Example 2: Revenue Recognition Error

A company is paid for services that will be provided over six months. However, instead of recognizing revenue over six months, the corporation records the entire revenue in the current period. As a result, revenue is overstated, and financial statements need to be revised.

Use the In Sentences

  • Errors of principles in accounting can result in inaccurate financial statements.
  • It's essential to understand and avoid principle errors to ensure financial statement reliability.


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