What happens if I don’t make a rectification entry?

If you fail to make a rectification entry (a double entry), the books of account will be out of balance, i.E., Not in equilibrium.

If an asset is wrongly valued at $1500, what happens to the equity section of the balance sheet?

Since an asset has been wrongly valued, the assets value will be too high and the equity section of the balance sheet would be overstated.

If an expense has been wrongly debited, what will its impact be?

As with errors of commission, if an expense has been wrongly debited, there would be no impact on the income statement. The income statement only includes relevant items. However, it may affect other financial statements depending upon whether revenue or capital is affected. For example, if an asset is wrongly valued or assets are written down, the balance sheet will be affected.

What happens if a revenue account has been credited instead of a capital account?

No impact. The income statement will not include this item because it is irrelevant to the company’s operations and very existence. It may affect other financial statements depending upon whether revenue or capital is affected. For example, if an asset is written up, the balance sheet will be affected.

I’ve forgotten what else needs to be done after the entry has been made – what happens now?

In order to prevent errors of principle from occurring again, managers should make sure that all transactions are recorded correctly. This can be achieved through better communication and supervision as well as making sure everyone knows what is expected of them.

Errors of Principle | Definition, Effect, & Examples

Errors of principle arise due to a bookkeeper's or an accountant's improper understanding of accounting and its core principles.

These errors resemble errors of commission except in one respect: errors of commission usually lead to oversight whereas errors of principle are caused by a lack of knowledge of accounting principles.

The common error is the treatment of capital expenditure as revenue expenditure (or vice versa).

Capital expenditure is expenditure on purchasing fixed assets, whereas revenue expenditure is incurred in the day-to-day running of the business.

For example, the purchase of a motor car is a capital expenditure while the purchase of fuel for the car is a revenue expenditure.

Effect on Accounts

As with errors of commission, errors of principle have the following effects on accounts:

Either the correct account will not be debited and an irrelevant account will be debited, or

The correct account will not be credited and an irrelevant account will be credited.

Errors of Principle: Rectification Entry

Rectification entries for errors of principle are the same as rectification entries for errors of commission. That is to say, if an irrelevant account has been debited instead of the correct account:

Debit the account that should have been debited

Credit the account that has been incorrectly debited

If an irrelevant account has been credited instead of the correct account:

Debit the account that has been incorrectly credited.

Credit the account that should have been credited.

Example

Some furniture was bought on credit for $2,500 for office use. It was debited to the purchases account. (This means that a capital expenditure is being treated as revenue expenditure.)