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
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, also called the Second Book of Entry, is a book that summarizes all the journal entries in the form of debits & credits to use for future reference & create financial statements. .
For example, ABC Inc. bought a new software worth the US $ 3000.00 from Z Tech Inc. for business purposes, 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
A transaction recorded in the primary book or Journal, however, omitted to post in either one of the ledgers is called Partial Omission.
In the above example, Partial Omission happens if the purchase of software from Z Tech Inc. is posted in Software Ledger A/c but forgotten to post in Z Tech Ledger A/c.
#2 – Error of Principle
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 the 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 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 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 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 for the company. It should be debited in the Purchase A/c instead of the Furniture account.
#3 – Error of Commission
This error refers to the recording of the transaction with the wrong amount or in a wrong account. 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 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
#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 debitDebitDebit is an entry in the books of accounts, which either increases the assets or decreases the liabilities. According to the double-entry system, the total debits should always be equal to the total credits. 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 the 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|
|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 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 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 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 –