Should the Accounts in your Chart of Accounts be linked or set to an incorrect Financial Category or Account Group, when you process and post transactions to the ledger, it may cause an error of principle. These errors may cause your figures to be displayed incorrectly on Financial Reports.

An example of such error of principle, is the following:

A transaction is posted to the incorrect account in the accounting equation. An example would be if an expense for motor vehicles, such as petrol or repairs were posted to the motor vehicle assets, account, etc. These transaction entries are in not correct according to the accounting principles. (e.g. since an expense is recorded as an asset).

 

In this case, your net profit would be inflated as the expense is not recorded as an expense and your assets would be inflated increased by the expense.