Companies rely on a well-run accounting system to understand what’s happening in the business. Major decisions are based on accurate information. Therefore, preventing accounting errors from occurring is crucial.
Understanding potential accounting errors will make all the difference in the ability to fix them and avoid pitfalls in the future.
What are accounting errors?
An accounting error is an unintentional bookkeeping mistake. More often than not, these errors are spotted easily and corrected. Unfortunately, some mistakes are harder to spot, making the cleanup process costly and time-consuming. A good example of a potential error is a mismatch between the credits and debits on the trial balance. These are easier to spot than others.
Accounting errors should not be confused with fraud, which is an intentional misrepresentation of accounting information. Fraud involves hiding or altering entries in a way that will benefit the company.
What are the types of errors in accounting?
Errors in accounting happen, sometimes inadvertently and sometimes through a lack of understanding of accounting principles. Either way, the information you get from your accounting system is only as good as the data you enter. When errors occur, the data cannot provide an accurate picture of the company to help make future decisions.
Some of the errors which occur are:
- Error of original entry
- Error of principle
- Error of omission
- Error of commission
- Error of transposition
- Error of duplication
Error of original entry
The first and most common error is one of original entry. The data entered into the accounting system is incorrect such as entering in the wrong amount.
Original entry error example
For example, for all accounts, a transaction is entered as $100 instead of $10 for debits and credits. Though the accounts balance because the debits and credits match, they all match for the wrong amount.
Error of principle
An error of principle happens when an accounting principle is misapplied in a particular situation.
Principle error example
A good example of this is entering equipment purchases as an operating expense. A fixed-asset purchase wouldn’t get entered as an operating expense because it’s not a day-to-day expense the company incurs. Also, fixed-asset purchases belong on the balance sheet, while operating expenses belong to the income statement.
Error of omission
These errors happen when an entry wasn’t entered despite a transaction taking place during that time.
Omission error example
For example, it often happens with accounts payable when the account is not credited when goods purchased on credit don’t make it into the ledger. Since accounts payable are short-term debts owed to supplies or vendors, it involves many moving invoices, which sometimes get lost in the shuffle.
Error of commission
In this instance, a bookkeeper or accountant records the debit or credit into the appropriate account but fails to update the correct subsidiary account or ledger.
Commission error example
Again, let’s look through an example. A customer makes a payment to the company, and the accounts receivable account is credited correctly but under the wrong client. The accounts receivable subsidiary ledger would show the error since it contains all of the client’s invoices and transactions.
Error of transposition
An error of transposition is one where the numbers in the recorded entry were transposed or written in the wrong order.
Transposition error example
Reversing the order of the numbers causes an overstatement or understatement on the books. For example, instead of recording a purchase at $945, the transaction is written as $549, causing $396 to go unclaimed.
Error of duplication
This error is as simple as it sounds. Either an expense or income item gets inadvertently entered into the books twice.
Duplication error example
Most of the time, this error takes place when more than one person has access to the accounting system, with each making an entry for the same transaction, causing an overstating of the amount on a particular account book.
How to detect and prevent accounting errors
Accounting errors sometimes occur despite best efforts. Finding and preventing errors starts with a few simple steps:
Step 1. Check the trial balance
Cross-check all the account books to determine if an error occurred. Double-books helps check if any error occurred during that accounting period. In addition, this review provides the ability to compare the trial balance against different books to determine if the end result is the same.
Step 2. Compare the data from books
This step involves comparing the data from books with the amounts listed on the trial balance. Such a comparison will assist in finding errors that didn’t get written down correctly.
Step 3. Check the balance of books of accounts
Balances on the books of accounts assist in detecting potential errors throughout the process. Using the information in the accounting software, it’s possible to know what the balances should be, and any mismatches will point in the direction of the error.
Step 4. Do a year-to-year comparison
Comparing the prior year to current year information is another good way to detect errors. For example, if the opening balance from the prior year is significantly different than the current year, an error will be quite easy to find.
Step 5. Check the books’ balance
Certain books in each company will record all of the transactions. These primary books provide a good way to check transactions and their amounts to find any potential errors. Though checking for errors this way might prove tedious in the long run, reviewing all transactions for possible errors provides a holistic overview of the accounts.
Frequently asked questions
Step 1. Check the trial balance.
Step 2. Compare the data from books.
Step 3. Check the balance of books of accounts.
Step 4. Do a year-to-year comparison.
Step 5. Check the books’ balance.
Common accounting errors include errors of original entry, errors of principle, errors of omission, errors of commission, errors of transposition, and errors of duplication.
Businesses rely on their financial data to decide the company’s future. So it becomes challenging for management to make the right choices allowing the company to prosper without correct information. But, of course, accounting errors happen, sometimes, despite people’s best efforts.
Accounting errors such as errors of original entry, errors of principle, errors of omission, errors of commission, errors of transposition, and errors of duplication all happen within many companies. Detecting and preventing these errors comes down to a few steps the accounting department can use to find the problem. Internal audits are also an integral part of finding accounting errors.
Want to hone your bookkeeping skills so you can accurately monitor the financial health of your company? Check out our mammoth list of 45+bookkeeping resources!
Agata Kaczmarek has held a passion for writing since early childhood. A professional writer for many years, Agata specializes in writing articles and blogs focused on finance as someone who holds a Master’s Degree in Accounting and Finance.
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