Accounting Online Program Certification Practice Test

What would constitute an error of principle in accounting?

1. Purchasing a new computer

2. Omitting plant and machinery from records

3. Debiting the equipment account correctly

4. Debiting to the correct account but incorrect amount

The correct answer is: Omitting plant and machinery from records

An error of principle occurs when an accounting treatment does not comply with generally accepted accounting principles (GAAP) or the fundamental rules of accounting. In the context of the choices provided, omitting plant and machinery from records represents a failure to recognize assets in the financial statements, which violates the principle of proper asset recognition and measurement. This issue specifically affects the integrity of the financial statements, as it misrepresents the company's true financial position. Assets should be recorded as part of the accounting equation, and failing to do so means the company's balance sheet would not reflect a complete picture of its resources. In contrast, the other options involve transactions that may not follow the specifics of a single accounting principle but do not constitute errors of principle. For instance, purchasing a new computer is a valid transaction that should be recorded, and debiting the equipment account properly indicates that the equipment is being recognized correctly, albeit in a proper context. Debiting to the correct account but for an incorrect amount may lead to an error affecting the financial figures, but it does not fundamentally undermine the principles that guide asset recognition.