An unintentional error in an accounting entry is called an accounting error. When an error or mistake is discovered, it is frequently corrected right away. An investigation into the error is carried out if it cannot be resolved right away. It is important to distinguish between an accounting error and fraud, which is the deliberate concealment or manipulation of data for the company’s advantage. The most frequent accounting errors are either clerical or accounting concept errors, even though there are many other kinds of errors.
Accounting errors are inadvertent bookkeeping mistakes that are occasionally simple to find and correct. An accountant can quickly determine which account is incorrect, for instance, if the trial balance’s debits and credits don’t add up to the same amount. Accountants utilize a particular kind of worksheet called the trial balance to document the debit and credit entries. After the reporting period, the trial balance totals are subsequently transferred to the financial statements. It can be more challenging to find and correct accounting errors in situations when they exist, but the trial balance is not out of balance. The Oxford Training Center‘s Strategic Accounting and Finance for Modern Managers Training Course is a thorough, practice-based curriculum created to improve the financial literacy of professionals in management and leadership positions.
7 types of accounting errors
Businesses that deal with large amounts of cash, including banks and stores, may unintentionally give out incorrect change or count money incorrectly. We refer to discrepancies between anticipated and actual amounts as “cash-over-short.” The income statement of the business includes this account. While there are many additional kinds of accounting errors, the following list includes some of the most prevalent ones.
1. Original entry error
When an account gets credited with the incorrect amount, this is known as an original entry error. Any other accounts connected to the transaction would similarly show the mistake posted for the incorrect amount. To put it another way, every account would be in balance, save for the incorrect sums.
2. Error of omission
When a transaction took place for the period but no entry was made, this is known as an error of omission. For instance, when products are bought on credit, the accounts payable account, which represents the short-term debts that businesses owe suppliers and vendors, is not credited. This occurs frequently when a large number of vendor invoices need to be documented but are either misplaced or improperly recorded. Another example of an error of omission would be failing to document a product sale to a customer or money collected from accounts receivable. The money owed by clients to a business for goods sold is represented by accounts receivable.
3. Error of duplication
When an accounting entry is duplicated, that is, debited or credited twice for the same entry, it is called a duplication error. An example of a duplication error would be an expense that was debited twice for the same amount.
4. The error of entry reveals
When an accounting entry is posted incorrectly, that is, a debit is recorded as a credit or vice versa, this is known as an error of entry reversal. For instance, finished inventory is debited rather than credited, and the cost of goods sold, which includes inventory and raw materials, is credited.
5. Error of principle
When an accounting concept is used incorrectly, it is called an error of accounting principle. A purchase of equipment, for instance, is recorded as an operating expense. The daily costs are known as operating expenses, and they do not involve the acquisition of a fixed asset. Additionally, the income statement should show operating expenses, while the balance sheet should show asset acquisitions.
6. Error of commission
When a bookkeeper or accountant records a debit or credit to the right account but to the incorrect subsidiary account or ledger, it’s known as an error of commission. For instance, funds received from a client are correctly credited to the accounts receivable account, but to the incorrect client. The subsidiary ledger for accounts receivable, which includes all of the transactions and invoices from the clients, would display the inaccuracy. Another example of an error of commission is a payment made to a vendor that is listed as accounts payable but is sent to the incorrect invoice or vendor. On the accounts payable subsidiary ledger, the error would appear as posted to the incorrect vendor.
7. Compensating error
When an offsetting entry that is likewise incorrect is used to offset one error, this is known as a compensating error. For instance, when an incorrect quantity is entered into inventory, it is offset by an equal amount entered into accounts payable to cover the inventory. For example, in the event that Jay has made purchases totaling ₹4000, ₹400 will be debited from his account. Such a transaction will result in a ₹3600 decrease on the debit side. In a similar vein, if Viru paid ₹4000 at that time and it was recorded as ₹400 in his account, the credit balance would have decreased by ₹3600. We can observe from the example above that a recording error resulted in a ₹3600 decrease in the debit side balance and a ₹3600 decrease in the credit side balance.
How to detect accounting errors?
If the accounting software is out-of-date or the journal keeper is careless, unintentional accounting errors are frequent. These kinds of mistakes are typically found at month-end book closings for businesses. After each week, certain businesses might complete this task. Most mistakes, if not all of them, are easily fixable. If a significant disparity cannot be promptly resolved, an audit trail can be required. In order to address insignificant differences, a suspense account is typically created on the balance sheet, or the small amount is netted out on the income statement as “other.”
Clerical errors can be decreased by monitoring invoices to clients and suppliers and making sure they are promptly and accurately put into the accounting software. Errors can be detected before the reporting period at the end of the quarter or fiscal year with the aid of monthly bank reconciliation. Comparing a company’s internal financial records and transactions to the bank’s statement records for the business is known as a bank reconciliation. Although no business can completely avoid mistakes, they can be found and fixed rather rapidly with the right internal controls in place.
Conclusion
Accounting mistakes can have detrimental effects on your company, ranging from monetary losses to legal issues. You may reduce the possibility of accounting errors and make sure that your financial statements accurately depict the state of your company by putting an emphasis on accuracy, utilizing technology, and encouraging a culture of continual development. Recall that proper accounting is about making well-informed decisions that promote success and growth, not merely about complying with regulations.