January 29, 2022

SB-Accounting

Accounting + Finance Blog

Key Errors that don’t affect trial balance: Error of Principle

Key Errors that don't affect trial balance: Error of Principle
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Certain errors won’t affect trial balance. This means that a trial balance will have the same balance, in terms of amount, on the debit and credit sides despite the occurrence of the error. In this article, the error of principle will be discussed. In the next one and other to follow, other types of this error will be explained. You can follow up here.

Meaning of Error of Principle

Here, a wrong class of account has been recorded. What is meant by a wrong class of account? You can read more about the classes of accounts. However, you can understand it this way. There is an asset account and expenses account. These are two separate classes of accounts. An illustration will explain better.

Assuming a staff wants to post a transaction in an expense account, but end up posting it in an asset account. This is an error of principle. This type of mistake is easy to correct. This example is proof.

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Example

Assuming Michael buys a spare part worth 45,000 Naira for the office car of Bruch Limited. Due to lack of knowledge, he wrote an invoice or entry for the motor car account. Whereas, the transaction supposes to be recorded in the motor car expenses account. Now post an entry to correct the error.

Solution

To correct the error, the first thing is to identify the account(s) in which the error has occurred. In this case, the entry was posted to a motor car account (which is the error). But it should be in motor car expenses a/c. To resolve the mistake, an entry is used to pull the transaction from the account in error (that is, the motor car account) to motor car expenses.

Here, we simply

Dr: Motor car expenses a/c and
Cr: Motor car account.

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Note also that Motor car a/c is an asset account. And the other is an expense account. Another way error of principle can occur is between a liability/capital account and income a/c.

How does this not affect the trial balance?

When the transaction originally occurred in the above example. Motor car account was debited and the Bank account (this is the bank account in the books of Bruch limited) was credited. Since the double-entry was entered correctly, it does not affect trial balance. Also, the correct amount of 45,000 was recorded without mistake. In this case, therefore, the error does not affect trial balance.

Conclusion

As you have read, the error of principle is about posting by mistake to the wrong class of account. This error does not affect trial balance as rightly explained. When the error occurs, all you need to do is pull out the amount in the wrong account by carrying out a counter entry and post it to the right account.

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