Correct Option: C. Error of principle Explanation of the Correct Answer In accounting, an error of principle occurs when a transaction is recorded in a way that violates fundamental accounting principles. In this case, Mallam Gambo purchased a freezer, which is a capital asset for his business, but he incorrectly recorded the transaction as an office expense.

1. Understanding the Nature of the Purchase:
2. The freezer is a long-term asset that will provide benefits to the business over several years. According to accounting principles, such purchases should be capitalized, meaning they should be recorded as assets on the balance sheet rather than as expenses on the income statement.
3. By debiting the office expenses account, Mallam Gambo is treating the purchase as a current expense, which reduces his profit for the period incorrectly. This misclassification can lead to misleading financial statements.
4. Impact of the Error:
5. The incorrect entry affects the financial statements by overstating expenses and understating assets. This can mislead stakeholders about the financial health of the business.
6. For example, if the freezer is recorded as an expense, it will reduce the net income for that period, which may affect decisions made by investors or creditors.

Why the Other Options are Incorrect A. Error of Commission: - An error of commission occurs when an entry is made incorrectly, such as recording the wrong amount or posting to the wrong account, but still within the correct category. In this case, the nature of the transaction itself is misclassified, not just the amount or account. - Since the freezer should have been recorded as an asset, this option does not apply. B. Error of Reversal of Entries: - This type of error happens when the debit and credit sides of a transaction are reversed. For example, if Mallam Gambo had credited the office expenses account instead of debiting it, that would be a reversal error. However, in this case, the accounts used are correct in terms of debiting and crediting; it’s the classification that is wrong. - Therefore, this option is not applicable. D. Compensating Error: - A compensating error occurs when two or more errors offset each other, resulting in no overall effect on the financial statements. Since Mallam Gambo's error does not offset another error, this option is also incorrect. - His error leads to a misrepresentation of financial data rather than a neutral effect. Summary of Key Points

• Error of Principle: Mallam Gambo misclassified a capital asset (freezer) as an expense, violating accounting principles.
• Impact on Financial Statements: This error can mislead stakeholders about the business's profitability and asset value.
• Other Errors Explained: Errors of commission, reversal, and compensating errors do not apply to this situation as they involve different types of mistakes.
• Correct Accounting Treatment: The freezer should be recorded as a fixed asset, and the correct entry would involve debiting the asset account (e.g., Freezer) and crediting the bank account.

Revision Summary

• An error of principle occurs when a transaction is recorded in violation of accounting principles.
• Capital assets should be recorded on the balance sheet, not as expenses.
• Misclassifying assets can mislead financial statement users.
• Understanding different types of errors helps in identifying and correcting mistakes in accounting records.