An error of principle is an accounting mistake in which an entry is recorded in the incorrect account, violating the fundamental principles of accounting. An error of principle is a procedural error, meaning that the value recorded was the correct value but placed incorrectly. For example, a company may record personal expenses as business expenses. An error of principle is different than failing to record the item in question (“error of omission”), or recording the wrong value in the correct account (“error of commission”). These errors are referred to as input errors. They're especially problematic in taxes.
Breaking Down Error Of Principle
The complexities of business transactions, along with the human component of accounting, can lead to errors. Discovering an error of principle takes some detective work, since looking at a trial balance, which contains the name of the account and its value, only shows whether debits equal credits. While how the error is corrected depends on the type of error, a common correction would be to subtract out the value of the item from the incorrect account and then add it into the correct account.
An error of principle can be considered a material error because it can affect how decisions are made. If a company discovers an error of principle after reporting its finances and determines that the error significantly impacts the report, it typically issues a restatement.