Management Notes

Reference Notes for Management

A sale of Rs. 50.000 to A was entered as a sale to B. This is an example of _

A sale of Rs. 50.000 to A was entered as a sale to B. This is an example of _


a) Error of omission
b) Error of commission
c) Compensating error
d) Error of principle

The Correct Answer Is:

b) Error of commission

The correct answer is b) Error of commission.


An error of commission occurs when a transaction is recorded incorrectly due to some action being taken, but the action is not in accordance with the standard accounting procedures. In this case, a sale of Rs. 50,000 to customer A was mistakenly recorded as a sale to customer B.

This is an example of an error of commission because an action (recording the sale) was taken, but it was done incorrectly, deviating from the standard accounting practice.

The mistake in recording the sale to the wrong customer constitutes a commission error because it involves an incorrect action, rather than an omission or a principle-related error.

Why the other options are not correct?

Now, let’s delve deeper into  why the other answer options are not correct:

a. Error of omission:

An error of omission happens when a transaction is entirely left out or omitted from the records. This could be a case where a sale, purchase, expense, or any other financial transaction is not recorded at all.

For example, if the sale to customer A was never recorded in the first place, that would be an error of omission. However, in the given scenario, the sale was recorded, but it was attributed to the wrong customer (B), so it doesn’t fit the definition of an error of omission.

In this situation, the action of recording a sale took place, but it was executed inaccurately. It was not a case of overlooking or forgetting to record the transaction.

c) Compensating error:

A compensating error occurs when one error cancels out another, resulting in the financial statements still balancing.

For instance, if an overstatement of expenses is balanced out by an equal and opposite overstatement of revenue, the financial statements may appear accurate, even though two significant errors have occurred.

However, in the given scenario, there is no indication that the error of recording the sale to customer B was offset by another error in the opposite direction. It’s simply a straightforward misclassification of the customer. There’s no indication that another mistake was made elsewhere to offset this specific error.

d) Error of principle:

An error of principle involves a fundamental violation of accounting principles. This happens when a transaction is recorded in a manner inconsistent with the accounting standards or principles.

For example, recognizing revenue inappropriately, using an incorrect method of depreciation, or applying an incorrect accounting treatment for a particular type of transaction.

In the provided scenario, the error is not related to a violation of accounting principles. It’s a simple misclassification of the customer, which does not involve the violation of any fundamental accounting principle.

To recap, the error described in the question is a classic example of an error of commission because it involves the incorrect recording of a transaction due to an action taken (recording the sale) that does not conform to standard accounting procedures.

It’s not an error of omission, compensating error, or an error of principle because the nature of the mistake is different.

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