Question

Mr. Hamid is running his small retail business under the name of Hamid Store. He has recently hired Mr. Imran as a junior accountant to maintain the books of accounts of his business. Mr. Imran has little knowledge in accounting. Recently, it has been observed that Mr. Imran wrongly treated installation charges of plant and machinery worth Rs. 500,000 as revenue expenditure under the heading of administration expenses. As a result, financial statements failed to reflect true and fair business affairs.

Answer 1

The type of error committed by Mr Imran is the error of principle.

Explanation:

An error of principle is a mistake done in the accounting. Because of this mistake, the entry is done in the wrong account. As a result of this, there is violation in the fundamental principles of Accounting. The meaning of this principle is that the value recorded was correct but the account in which it was recorded was not correct.

In the example given in the question, as a result of the error of principle, there is understatement of the assets of the firm of Mr Hamid because the value that was to be recorded in the assets account is recorded somewhere else, in the account of charges of plant and machinery.