Accounting errors are common mistakes that might occur during recording various accounting entries. These errors are unintentional and not fraudulent in nature. But you need to get rid of them to have a clear and error-free account statement.
A correct account statement is necessary to know the correct status of a business. The figures help you know what exactly is happening in your business.
But it is important for many other reasons too. Getting the right tax figures and governmental policy obligations are some of them. So altogether, having an error-free accounts book is essential for every business.
Some accounting errors are small which may not lead to major discrepancies in your financial statements. Meanwhile, some accounting errors may be too big to distort your financial figures.
This article will discuss some common accounting errors and their impact on your business. You will also get some tips to prevent such errors while keeping your account books up to date.
Different Types of Errors in Accounting
Your accounting system will be as good as the data you enter into it. These entries may go wrong due to clerical mistakes or misunderstanding of the account rules. Broadly, all the types of errors in accounting can be classified into the following categories.
- Error of original entry
When you enter the wrong figures into an account book, it leads to an error in the original entry.
Since various other transactions may occur after that, they will have erroneous values. Finally, you will get the wrong value for all the transactions done after the wrong entry.
- Error of duplication
As the name suggests, such an error happens due to duplicate entries. That means whether you are entering for a debit or credit, the same amount is entered twice. As a result, your account book will show either more expense or income.
- Error of entry reversal
Sometimes credit is entered as debit or vice versa. Such is called an error of entry reversal. Suppose you have an invoice for $1500. You enter it as payable instead of receivable. That will lead to an entry marked as an expense instead of an income.
- Error of principle
When you apply a wrong accounting principle while entering any transaction into your account book, it leads to an error of principle. In other words, a correct entry is written in the wrong place.
For example, if you record your personal expenses as business expenses, you commit an error of principle. Because your overall accounting will still have errors even if you have recorded the right amount.
Remember that it is considered a serious procedural error. Such procedural errors can result in big consequences.
- Error of omission
When you miss entering the record for a transaction, that is called an error of omission.
For example, when you fail to enter the debit of payment to a vendor, it is an error of omission. Or you fail to record a credit when an invoice is paid.
These errors may be unintentional, but they show a lack of seriousness in recording transactions. Also, this might happen when you must do various entries at a time. Sometimes this might occur due to the misplacement of documents.
- Error of commission
When an entry is made to the right account but the wrong subsidiary account or ledger, it is called an error of commission.
For example, you receive money from a customer. You enter it as money credited, but the customer’s name is different.
Similarly, when you are paying a vendor but recording it in another vendor’s name, that is also an error of commission.
- Compensating error
When you compensate a wrong entry with another wrong entry, it is called a compensating error.
To put it another way, suppose you wrongly overstate your income balance by $1,000, and you also increase the expense by $1,000. The net resultant value of income and expense will be even, but both entries here are incorrect.
- Error of transposition
This error occurs when you reverse the numbers of an amount. Due to this reversal, the value may either be overestimated or underestimated.
For example, you have to enter an expense of $946. But you wrongly entered the value as $496. The result? You will have a balance of $450.
Such errors can cost you heavily if they go unnoticed. You have to be careful about such entries.
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How Can Common Errors in Accounting Impact Your Business?
Accounting errors, both minor and substantial, can result in dire consequences. Here is how types of errors in accounting can impact your business.
Miscalculated income statement: Misreporting expenses may mangle the computed operating profit margins of the company or over-report income.
Miscalculated cash flow statement: The incorrect reporting of items may overstate or understate the cash in hand amount to pay bills.
Miscalculated expense statement: If your accounts fail to record business expenses, it means you have not recorded the right deductible expense. The wrong statement will lead to overpayment of taxes.
Discrepancy in income and expenses: Unclassified statements may lead to a mishap in reporting accrual accounting for the company. You need to match the expenses with the generated income properly. In case you record the expenses in a different month or year, the report will not tally.
Fraudulent financial activities: When accounting books show serious discrepancies and wrong figures, it means something is wrong. It’s time for the business to investigate the matter.
Financial mismanagement or fraud in any business is unfortunate. But more importantly, it can lead to profound consequences, including criminal proceedings and reputational loss for the business.
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Tips to Avoid Accounting Errors by Small Businesses
If the accountant or the journal keeper is unmindful while entering the data, unintentional errors are bound to happen. Such errors may also result from outdated accounting software.
It is revealed only when the companies do the book closing at the month-end. Some companies tally their accounts weekly to avoid piling up wrong entries.
In most cases, companies can correct their accounting errors without much hassle if they periodically recheck and re-verify every entry.
Here are some essential tips to avoid accounting errors and have an error-free account book.
- Train your accounting staff well
Employees entering accounting data must understand it well, especially the accounting requirements of your company. Thus, ensure they are trained and have complete knowledge about your business needs.
You can also make a standard procedure and guidelines for proper documentation. This will ensure all entries are made accurately and timely. Likewise, you can have an expert who can oversee the whole work and help in avoiding major accounting errors.
- Avoid overburdening your employees
Accounting data needs continuous update to keep a record of every expense detail. But overloading employees to stay updated is not a solution.
When employees are overburdened with work, they are more likely to make errors. Give them adequate time to keep all the books updated.
You can even find out new ways to make data entry simplified. Using the best accounting software for data entry is one of them.
- Automate your data entry with accounting software
These days, the market is flooded with accounting software with various features and advantages. You can use them to keep your account book up to date and error-free.
You can choose between desktop versions and cloud versions. Even smartphone versions can help small businesses maintain their accounts. This accounting software can even automate most of your manual entries, leading to fewer chances of errors.
- Devise internal control to check errors
Work on the approach to detect types of errors in accounting and correct them instantly. Conducting monthly bank reconciliations is one way to detect accounting errors early. Even for credit card statements, you can adopt a similar practice for tallying your transaction data.
Adopting internal control and checks will also prompt your employees to work meticulously. This will ease the burden on everyone’s part.
- Tally your budget and actual expenses
You cannot rule out the chances of discrepancies between your budget and data entry. Hence, it’s essential to tally your budget and expenses now and then. Doing so will give you a clear idea of financial activities.
- Conduct a periodic review of your accounts
Always conduct periodic reviews of your accounts. Ensure that the entries in account books are appropriate and meet the Generally Accepted Accounting Principles (GAAP) norms.
It may be a tedious task for manual bookkeeping to review every entry. But automated accounting software can make work easy to review your account entries.
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Some types of errors in accounting are easy to fix, like minor day-to-day expenses. You can either change the entry or enter the value if it is missing.
But some wrong entries may not be easy to change or correct like that in a tax statement. Given their complex significance, you may have to change your whole accounting method.
You might suffer huge losses due to certain accounting errors in some cases. So, correct mindful accounting is of vital importance for every business or organization.
Accounting errors are part of day-to-day affairs. No sophisticated software or cloud-based computing system can prevent errors. But detecting the errors at the earliest and correcting them is more important.
- What are the 4 types of accounting?
The 4 types of accounting are
1. Corporate Accounting
2. Public Accounting
3. Government Accounting and
4. Forensic Accounting.
- What happens when accountants make mistakes?
When an accountant makes a mistake, it is either revealed during the financial statement preparation. Some errors of omission might lead to stock, cash, and passbook mismatch, which is revealed during the concurrent, internal, or statutory audit.
- What are the two types of errors in accounting?
Errors of omission and errors of commission are the two different types of errors in accounting.
- How do you avoid accounting mistakes?
Tallying the daybook daily and reconciling cashbook and passbook weekly reduces omission errors, while regular audit helps avoid errors of commission.
- What is the error of commission?
Errors of commission are those errors recorded to the correct account but on the wrong ledger or party.
- What are some major types of errors in trial balance?
The major types of errors in trial balance are duplicate posting, omission errors, and commission errors.
- What is an error in accounting?
An error in accounting is a non-intentional mistake while recording or passing any entry in the books of account.
- How do you ensure accuracy in accounting?
Using accounting software and internal audit helps to ensure accuracy in accounting.
- What are some most common accounting errors?
Duplication and omission are the most common accounting errors as accounting software can't check duplicate entries.
- What are the types of bookkeeping accounts?
Booking keeping accounts are the major accounts under which all transactions and entries are recorded. Sales, Purchase, cash, Account payables, account receivables, etc., are the basic types of bookkeeping accounts.