December 12, 2019

Types of Error in Accounting

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Types of Error in Accounting

An error in accounting is a non-fraudulent error in double-entry bookkeeping of transactions. In most cases, it happens due to a lack of accounting knowledge or carelessness of a bookkeeper.

The business should take appropriate investigating measures as soon as it spots a mistake.

Unlike an accounting error, accounting fraud is a deliberate falsification or misrepresentation of the financial affairs of the entity. One should not confuse these two definitions. 

Businesses can quickly identify some errors while others take time. In the first case, it happens when the debits do not equal the credits in the trial balance. The latter indicates that the error did not affect the trial balance, and it could be tricky to detect it instantly. On this basis, to solve the problem, the business would show the trial balance discrepancy in a temporarily created suspense account.

The numerous error types described below are typical in bookkeeping:

Accounting errors that Affect the Trial Balance

  • An error of omission: partially omitting data will lead to an imbalance in the trial balance;
  • An error of commission: ledger totals don’t match, an incorrect figure entered in the accounts, data entry on the opposite side of the accounts.

Errors Which do not Affect the Trial Balance

  • Omission error: Missed data entry in the books;
  • Commission error: Input of data to the wrong account;
  • Principle error: Incorrect input of a transaction;
  • Compensating error: Two separate errors compensate each other;
  • An error of original entry: Proper double entry with inaccurate figures;
  • Reversal of entries: Right amount and correct account but posted on the wrong side (debits and credits are switched).

Error of Principle in Accounting

This sort of error is also called an input error when the real value of the entry is not posted to the correct account.

For instance, a $700 purchase of office chairs is debited to the office expense account in place of the purchase account. The following correction will look like this: 

Error of Principle in Accounting

Error of Omission in Accounting

A financial transaction missed in the company’s accounting records refers to as an error of omission. There are two sub-types of this kind of error to be known:

  • A complete error of omission
  • A partial error of omission

In the case of complete omission, the transactions are failed to be entered altogether. Partial omission means that a transaction has been recorded only on one side.

Error of Omission in Accounting

This example of partial omission shows accounts receivable account is not debited when goods are sold on credit.

Error of Commission

An error of commission is the data input to the correct account, but with the wrong value, e.g., the bookkeeper enters the purchase of products for $3,000 in the ledger as $300.

Compensating Error

Compensating error pops up when two errors in related accounts balance each other out.

Error of Original Entry

An error of original entry means a mistake in data entry when posting a new recording, e.g., two digits are reversed.

Complete Reversal of Entries

An error of reversal takes place if an entry is debited rather than credited, or vice versa.

For instance, a $400 invoice sent to a client is input in accounts payable instead of accounts receivable.

Conclusion

To prevent errors in your accounting records, you should develop methods for identifying them and taking actions for the corrections as soon as they happen. It is an important skill to keep your business running smoothly. To achieve that, it should become a routine job for you or your bookkeeper to conduct various reconciliations promptly.

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