Accounting Errors Definition
Accounting Errors refer to the common mistakes made while recording or posting accounting entries. These discrepancies are not fraudulent and generally unintentional in nature.
Types of Accounting Errors with Examples
#1 – Error of Omission
When a business transaction or event is not recorded in the books of accounts by mistake, it is termed as Error of Omission. It could further be classified as:
a) Error of Full Omission
Where a transaction is not recorded in Journal or not at all posted in the respective ledger accounts.
For example, ABC Inc. bought a new software worth the US $ 3000.00 from Z Tech Inc. for business purpose but accidental forgets to enter it in the books of accounts.
Or, ABC Inc. posted the following entry to record the above transaction in Journal
However, the company forgot to post the recorded amount in respective ledgers i.e. Software A/c and Z Tech Inc. A/c by US $ 3000.00 is classified as an error of complete Omission.
b) Error of Partial Omission
When a transaction is recorded in the primary book or Journal, however, omitted to post in either one of the ledgers.
In the above example, if the purchase of software from Z Tech Inc. is posted in Software Ledger A/c but forgot to post in Z Tech Ledger A/c such omission will be classified as a partial omission.
#2 – Error of Principle
When a fundamental accounting principle is violated while recording the financial transactions, it is termed as Error of Principles. Simply, the error of principle occurs when:
- Revenue expenditure / Incomes is treated as Capital Expenditure / Incomes or vice versa;
- Operating Expenses / Incomes are classified as Non-operating expenses / Incomes or vice versa;
- Personal Expenses are considered as Business Expenses or vice versa;
For instance, ABC Inc. is in the business of trading Furniture. The company bought new furniture for the US $ 5000.00 for the purpose of reselling. However, the accounts executive at ABC Inc. accidentally debited the Furniture A/c (as an asset – capital expenditure) instead of Purchases A/c (as an inventory – Revenue Expenditure).
As the company is in the business of trading furniture, the purchase of furniture is a revenue expenditure for the company and should be debited in the Purchase A/c instead of Furniture account.
#3 – Error of Commission
This type of accounting error refers to the recording of the transaction with the wrong amount or in a wrong account. The few examples of the occurrence of an error of commission are stated below:
- Recording the wrong amount in the correct books of accounts
Rent of US $ 100.00 paid to John gets recorded as
- Posting the wrong amount in the correct ledger account
Rent of US $ 100.00 paid to John gets recorded in the credit side of cash A/c as
- Posting the correct amount in wrong account
Say Rent of US $ 100.00 paid to John gets recorded as:
- Posting the correct amount on the wrong side
Salary paid of US $ 1,000 gets recorded in the credit side of salary account for the US $1,000.
- Posting the same amount twice in the Ledger
Commission of US $ 200 received from Tony gets recorded twice in the commission account
- Wrong casting of the subsidiary books accounts
This accounting error is made in the totaling of the subsidiary books.
Example: The total of the debit side of the Machine Account which is the US $ 5,050.00 gets recorded as the US $ 5,005.00
- Wrong balancing of the ledger accounts
This may cause the short or excess balance in ledger accounts
#4 – Compensating Errors
These errors occur where the effect of one transaction offsets the effect of another and nullifies the final effect on the Trial Balance.
For instance, ABC Inc. received the US $ 10,000 from Mark and paid the US $ 1,000 to Jim. Now, if Mark A/c got credit by the US $1000 and Jim’s A/c got debit by the US $ 10,000 in such case excess debit of US $ 9,000 will gets nullify by short debit by the US $ 9,000. In this case, the trial balance will agree.
Impact of Accounting Errors on Trial Balance
In book-keeping, if the total of debit and credit side of trial does not agree, there might be an occurrence of some accounting error which led to the disagreement. However, there are some errors that do not affect the agreement of trial balance yet may have incurred. Thus it is important to understand the impact of accounting errors on Trial Balance.
|Accounting Errors||Impact on Trial Balance (Total will Agree or not)|
|Error of Principle||Agree, as both debit and credit side gets recorded in the books of accounts however the nature of transaction has altered|
|Error of Complete Omission||Agree, as both the debit and credit balances are not recorded|
|Error of Partial Omission||Disagree, as either debit or credit transaction is omitted|
|Compensating Errors||Agree, as the effect gets nullifies|
|Error of Commission|
|Recording the wrong amount in the correct books of accounts||Agree, as the same wrong amount is entered both sides|
|Posting the correct amount in wrong account||Agree, as the correct amount is recorded on correct side (debit/credit) but in wrong ledger a/c|
|Posting wrong amount in the correct ledger account||Disagree, due to mismatch of the amount in either of the ledger|
|Posting the same amount twice in the Ledger||Disagree, due to dual reporting|
|Wrong casting of the subsidiary books||Disagree, due to mismatch in totaling and balancing|
|Wrong balancing of the ledger accounts|
This has been a guide to Accounting Errors and its definition. Here we discuss the types of accounting errors along with the examples and their impact on the trial balance. You can learn about accounting from the following articles –