Error of principle occurs due to the incorrect classification of expenditure or receipt between capital and revenue. This error arises when a transaction is recorded in the wrong category, violating the fundamental accounting principles.

Explanation:
Errors of principle occur when a transaction is not recorded in the appropriate category, either as capital or revenue. These errors violate the fundamental accounting principles, such as the matching principle and the principle of consistency.

1. Matching Principle: The matching principle states that revenue should be recorded in the same period as the expenses incurred to generate that revenue. By misclassifying an expenditure or receipt, the matching principle is not followed, resulting in an error of principle.

2. Principle of Consistency: The principle of consistency requires that accounting practices and classification of transactions should be applied consistently over time. If a transaction is incorrectly categorized, it violates this principle and leads to an error of principle.

Effects of Error of Principle:
- Incorrect financial statements: Errors of principle can lead to inaccurate financial statements. For example, if a revenue item is recorded as a capital receipt, the revenue for the period will be understated, leading to a lower net income or profit.

- Misinterpretation of financial performance: Misclassification of expenditure or receipt can distort the interpretation of a company's financial performance. It can make it difficult for stakeholders to understand the true nature of the transactions and assess the company's financial health.

- Incorrect decision-making: If the classification of a transaction is incorrect, it can lead to wrong decision-making. For instance, if a capital expenditure is misclassified as revenue expenditure, it may result in incorrect calculations of depreciation and affect long-term investment decisions.

Prevention and Correction:
- Adequate knowledge and understanding of accounting principles and concepts can help prevent errors of principle.
- Regular review and reconciliation of financial records can help identify and correct any misclassifications.
- If an error of principle is identified, it should be rectified by making the necessary adjustments and reclassifying the transaction correctly.

Conclusion:
Error of principle occurs when there is an incorrect classification of expenditure or receipt between capital and revenue. It violates fundamental accounting principles and can lead to inaccurate financial statements, misinterpretation of financial performance, and incorrect decision-making. Regular review and adherence to accounting principles can help prevent and correct such errors.

Sorry sir Maine dhyan se ni Dekha tha....yes errors of principal