From time to time, you will make accounting errors, so knowing how to catch these discrepancies is an important skill to develop regardless of what accounting software application your team and company uses.
The moment an error is spotted, investigative measures should immediately be taken to correct the mistake. Time is of the essence here, as undetected errors can linger in your ledgers and compound over time – creating a chaotic situation later.
Some accounting errors can be easily identified and others will take time. You can spot the easy errors when the debits do not equal the credits in the trial balance. The harder errors to identify do not affect the trial balance. Detecting these errors requires investigative expertise. Until you can find and correct the source of the error, you should show the trial balance discrepancy in a temporary suspense account.
What is An Accounting Error?
An accounting error is an unfraudulent, unintentional error in a double entry bookkeeping transaction.
Opposite of accounting errors, accounting fraud is a deliberate falsification or misrepresentation of the financial affairs of the entity. It’s crucial that you and/or your team never confuse the two, as errors just need to be corrected, and fraud warrants prosecution.
Types of Accounting Errors
Accounting Errors Affecting the Trial Balance
As mentioned above, errors that throw the trial balance out of balance are relatively easy to detect. The following two types of errors are common when the ledger accounts do not balance.
Error of Omission:
When a transaction is completely omitted from the books of your company, thus creating an imbalance in the trial balance. For example, you enter a debit in one account without entering an offsetting credit in another account.
Correcting errors of omission
A financial transaction missed in the company’s accounting records is an error of omission. Two subtypes of this kind of error are common:
A complete error of omission: failure of the transaction altogether.
A partial error of omission: the transaction has been recorded on only one side of the ledger.
See the example below….
Account DR CR
Sales A/C 1500
Accounts Receivable A/C wrong –
To correct a partial error of omission, simply enter the missing element of the transaction:
Account DR C R
Sales A/C 1500
Accounts Receivable A/C correct 1500
Error of Commission:
When a transaction is entered to the correct class but the wrong subsidiary ledger. For example, you apply a payment to the wrong invoice. Your trial balance will show the correct amount owed by a customer, but your individual customer’s subsidiary ledgers will be incorrect.
Correcting errors of commission
An error of commission is often called a clerical error. It occurs when an incorrect value is entered in the ledger. For example, the bookkeeper entered a sale of products for $300 instead of the actual value of $3,000.
To correct an error of commission, you must first reverse the incorrect amount and then enter the correct amount. In the illustration below, the first two rows are the error of commission. They are followed in the next two rows by the reversing entries and then the correct entries.
Account DR CR
Sales A/C wrong 300
Accounts Receivable A/C wrong 300
Sales A/C reverse 300
Accounts Receivable A/C reverse 300
Sales A/C correct 1300
Accounts Receivable A/C correct 1300
Errors Not Affecting the Trial Balance
Errors can occur in the account ledgers that do not throw the trial balance out of balance. These errors can be hard to find and require knowledgeable investigation.
Omission error: A transaction was simply not recorded in the ledger. Your company made a sale, failed to record it.
Commission error: Data was recorded in the wrong accounts. The purchase of office supplies was recorded in the account for utilities expenses.
Error of Principle
The transaction was recorded improperly. The purchase of an asset was misclassified as an expense.
Correcting errors of principle of accounting:
Also called an input error, this error occurs 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.
To correct this type of error, simply enter offsetting debits and credits to the affected accounts as shown in the illustration below:
Account DR CR
Office Expenses A/C wrong 700
Purchase A/C correct 700
Compensating errors pop up when two errors in unrelated accounts balance each other out. At the end of the day, the ledgers balance, but the values were credited and debited to the wrong accounts.
For example, you sold a product for $1,500 but the bookkeeper recorded only $500 for the sale. Later, your company bought supplies for $2,500 but recorded only $1,500 for the expense.
In both cases, the differences of $1,000 in incoming and outgoing accounts cancel each other out in the trial balance.
Correcting compensating errors
To correct a compensating error, reverse the incorrect transactions and then enter the correct transactions, as in the following example:
Account DR CR
Purchases wrong 500
Accounts Payable wrong 500
Sales wrong 800
Accounts Receivable wrong 800
Purchases reverse 500
Accounts Payable reverse 500
Sales to reverse 800
Accounts Receivable reverse 800
Sales correct 500
Accounts Receivable correct 500
Purchase correct 800
Accounts Payable correct 800
Error of Original Entry:
An incorrect amount was posted to the correct accounts. The bookkeeper incorrectly entered $594 instead of $549 in both the debit and credit accounts.
Correcting errors of original entry:
In an error of original entry, the bookkeeper mistyped the value of an entry, such as reversing two digits in a number.
To correct an error of original entry, reverse the incorrect transaction and then record the transaction with the correct value.
Reversal of Entries:
The right amount was entered in the correct accounts but the debit and credit categories were accidentally switched.
Correcting reversal of entries:
An error of reversal takes place when a credit is entered as a debit and a debit is entered as a credit. For instance, a $400 invoice sent to a client is input in accounts payable instead of accounts receivable.
Correct this error by reversing the incorrect debit and entering the correct credit, as in this example:
Account DR CR
Sales A/C 400
Accounts Payable A/C wrong 400
Accounts Payable A/C reverse 400
Accounts Receivable A/C correct 400
Accounting errors are common in business.
However, if you’re not careful, small inaccuracies can creep in, take up residence and -if they go unnoticed – can compound into a messy situation down the line.
To best prevent accounting errors and ensure that your books are always clean, reach out to an experienced bookkeeper who is familiar with all forms of accounting errors and reliable methods. With a clear, accurate picture of your company financials, you and your team will be empowered with the ultimate confidence when facing tax season, investment opportunity, scaling measures, and more!
At MCDA CCG, we provide high quality, customizable bookkeeping services committed to the longevity of our clients and their success.
Reach out to one of our accounting experts today to see how we can clear up any uncertainties you may feel regarding your business financials and the solutions that will meet your unique needs.
Enlisting the help of an accounting professional can be the difference between messy financial statements and your companies greatest tool. Contact our office headquarters in Placentia, Orange County, California today!