What Are Accounting Errors?
Accounting Errors refer to the common mistakes made while recording or posting accounting entries. These discrepancies are not fraudulent or intentional. . Companies can easily identify these mistakes while tallying accounts and can rectify them as soon as they are detected.
Accounting errors arise out of mistakes related to accounting principles or clerical errors. These are different from the accounting records tampered with to serve individual interests or selfish motives. These errors are usually noticed while discrepancies are observed in the data recorded or being tallied.
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Accounting Errors Explained
Accounting errors are unintentional mistakes that occur while accounting professionals record or account for data. It does not arise because of the selfish motives of the employees or the company itself. It just happens because of clerical mistakes or any recording error.
These errors are not counted as frauds, which occur due to intentional tampering with the data. In fact, these mistakes are identified as and when a discrepancy is noticed in the financial statements or account books. As soon as the error is identified, the accounting professionals take care of it then and there.
Sometimes, there is a missing entry or a duplicate entry that results in accounting errors. Apart from these, there are other forms of common errors that arise. However, identifying and rectification of these errors is easy when accounting professionals are a bit careful while recording the transactions.
Based on the causes, the accounting errors are divided into following categories:
#1 – Error of Omission
An error of omission is a business transaction or event not recorded in the books of accounts by mistake. Further classifications of Error is Omission are:
a) Error of Full Omission
Where a transaction is not recorded in Journal or not at all posted in the respective ledger accountsLedger AccountsLedger in accounting records and processes a firm’s financial data, taken from journal entries. This becomes an important financial record for future reference. It is used for creating financial statements. It is also known as the second book of entry..
b) Error of Partial Omission
However, a transaction recorded in the primary book or Journal omitted to post in either one of the ledgers is called Partial Omission.
#2 – Error of Principle
An error of Principles happens when a fundamental accounting principleAccounting PrincipleAccounting principles are the set guidelines and rules issued by accounting standards like GAAP and IFRS for the companies to follow while recording and presenting the financial information in the books of accounts. is violated while recording financial transactions. This error occurs when:
- Revenue expenditureRevenue ExpenditureRevenue expenditure refers to those costs incurred during regular business operations by the organization while availing its benefits in the same period. Such operating expenses include rent, utility expenses, salary, insurance expenses, etc. / Incomes are treated as Capital ExpenditureCapital ExpenditureCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year. / Incomes or vice versa;
- Operating ExpensesOperating ExpensesOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit. / Incomes classified as Non-operating expensesNon-operating ExpensesNon operating expenses are those payments which have no relation with the principal business activities. These are the non-recurring items that appear in the company's income statement, along with the regular business expenses. / Incomes or vice versa;
- Personal Expenses are considered as Business ExpensesBusiness ExpensesBusiness expenses are those incurred in order to successfully run, operate, and maintain a business. Travel & conveyance, salaries, rent, entertainment, telephone and internet expenses are all examples of business expenses. or vice versa;
#3 – Error of Commission
This error refers to the transaction recording with the wrong amount or in the wrong account.
#4 – Compensating Errors
These errors occur when the effect of one transaction offsets the effect of another and nullifies the final effect on the Trial Balance.
Some of the common causes of accounting errors include the following:
- The lack of knowledge of the accounting professionals or those recording the data may be the cause. There are instances where the professional is not sure where to enter the data in the book of accounts.
- Being careless makes even the minutest errors to go unnoticed.
- The system or server errors may restrict the data to be recorded, which might lead to missing entries.
- Internal checking may have been delayed or ignored, leading to such errors.
How To Find?
before rectifying these errors, it is important to detect these errors. Listed below are some of the ways to identify these accounting errors. Let us have a look at them:
- It is important to have an audit trail whereby firms can narrow down the transactions and check for mistakes.
- Have a consistent process of detecting accounting mistakes that might occur from time to time.
- After recording the transactions/data, double-checking the same is recommended.
- Regular reconciliations are a must.
Let us consider the following instances to understand the accounting errors definition in detail and also check the way to rectify it:
Example 1 – Error of Omission
For example, ABC Inc. bought a new software worth the US $ 3000.00 from Z Tech Inc. for business purposes but accidentally forgot to enter it in the books of accounts.
Or, ABC Inc. posted the following entry to record the above transaction in the 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 the US $ 3000.00, classified as an error of complete omission.
In the above example, however, Partial Omission happens if the software purchase from Z Tech Inc. is posted in Software Ledger A/c but forgotten to post in Z Tech Ledger A/c. This exemplifies partial omission instance.
Example 2 – Error of Principle
For instance, ABC Inc. is in the business of trading Furniture. The company bought new furniture for US $ 5000.00 to resell. 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. It should be debited in the Purchase A/c instead of the Furniture account.
Example 3 – Error of Commission
The following examples are the occurrence of the error of commission:
- 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 the 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 the 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.
- The wrong casting of the subsidiary books accounts
This accounting error happens 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 error may cause the short or excess balance in ledger accounts
Example 4 – Compensating Error
For instance, ABC Inc. received the US $ 10,000 from Mark and paid 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 a case, an excess debt of US $ 9,000 will get nullified by shortDebit represents either an increase in a company’s expenses or a decline in its revenue. debitDebitDebit represents either an increase in a company’s expenses or a decline in its revenue. by the US $ 9,000. In this case, the trial balance will agree.
If the trial’s total debit and credit side do not agree in bookkeeping, some accounting error might occur, leading to disagreement. However, some errors do not affect the trial balance agreement yet may have been incurred. Thus it is important to understand the impact of accounting errors on Trial BalanceTrial BalanceTrial Balance is the report of accounting in which ending balances of a different general ledger are presented into the debit/credit column as per their balances where debit amounts are listed on the debit column, and credit amounts are listed on the credit column. The total of both should be equal..
|Accounting Errors||Impact on Trial Balance (Total will Agree or not)|
|Error of Principle||Agree, as both the debit and credit side gets recorded in the books of accounts; however, the nature of the transaction has altered.|
|An error of Complete Omission||Agree, as both the debit and credit balancesCredit BalancesCredit Balance is the capital amount that a company owes to its customers & it is reflected on the right side of the General Ledger Account. Usually, Liability accounts, Revenue accounts, Equity Accounts, Contra-Expense & Contra-Asset accounts tend to have the credit balance. are not recorded|
|An 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 on both sides|
|Posting the correct amount in the wrong account||Agree, as the correct amount is recorded on the correct side (debit/credit) but in the wrong Ledger a/c|
|Posting the wrong amount in the correct ledger account||Disagree due to a mismatch of the amount in either of the Ledger|
|Posting the same amount twice in the Ledger||Disagree, due to dual reporting|
|The wrong casting of the subsidiary books||Disagree, due to a mismatch in totaling and balancing|
|Wrong balancing of the ledger accounts|
How To Correct?
Accounting errors and corrections should be a consistent affair. So, if the error has already occurred, here are the ways to correct and prevent it:
- Undergo regular checks and reconciliation to make sure there is no discrepancy. Internal checking helps rectify issues before they come to the notice of the external audit team.
- Deployment of sound software solution that eradicates the chances of human errors.
- Be careful while recording transactions and data. A little carelessness leads to major errors.
This has been a guide to what are Accounting Errors. We explain its types, how to correct it, causes, examples, and how to prevent & impact the trial balance. You can learn about accounting from the following articles –