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 the fundamental principles of accounting. 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.
4. Impact of the Error:
5. This misclassification affects the financial statements. The income statement will show lower profits due to the higher expense recorded, and the balance sheet will not reflect the asset that should be there. This misrepresentation can lead to poor decision-making based on inaccurate financial data.

Why 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 was misclassified entirely, so 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 debited the bank account and credited the office expenses account instead, it would be a reversal error. However, in this case, the accounts used are not simply reversed; they are fundamentally incorrect. 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 balance out with another error, this option is not applicable. Summary of Key Points

• Error of Principle: The purchase of the freezer should have been recorded as a capital asset, not an expense.
• Impact on Financial Statements: Misclassifying the freezer as an expense leads to inaccurate profit reporting and asset representation.
• Understanding Errors: Different types of errors (commission, reversal, compensating) have specific definitions that do not apply to this situation.

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 on the income statement.
• Misclassification can lead to misleading financial statements and poor business decisions.
• Understanding the nature of errors helps in identifying and correcting them effectively.