Errors in Accounting
Like any other type of information, Financial data reported by accountants play a vital role in forming conclusions and decisions by its users. Accounting information is relied upon and used by various stakeholders both by the internal and external stakeholders, which ultimately direct to make decisive conclusions and significant economic decisions. The information presented by the accountants can however lead to misleading conclusions and wrong decisions if the data is not objective and free from errors.
Incorrect record maintenance and reporting of financial affairs will result in misleading conclusions and wrong decisions by the management and the investors. Not only that, but erroneous financial reporting also may have legal consequences because the presence of errors even by mistake may ultimately be seen as intentional misstatement especially when reported to the government, court of law, or tax authorities.
ControlS to avoid ERRORS in ACCOUNTING
Considering the significance of the financial information presented to the users and stakeholders, various controls at different stages of recording and summarizing accounting information are designed. These controls are in place to ensure error-free recording of information is being carried out. The accounting cycle inherently is designed to identify and correct those errors made intentionally or by mistake while recording the information into the books of accounts. A few of such controls are exemplified below;
Sales/ Purchase Ledger Control Account
A control account is the ledger account in which a summary of transactions is recorded from daybooks/ journals after a specific period. Whereas The detailed information of each transaction with every customer/ supplier is maintained in a subsidiary/ memorandum account.
Personal/ subsidiary accounts of customers are reconciled with their books of accounts and ultimately compared with the Control Account. The two stages comparing and reconciling process help to ensure that all transactions have been correctly recorded into proper accounts.
Trial Balance
Trial Balance is another form of control implemented while recording and reporting accounting information. Trial Balance enlists the balances of all ledger accounts maintained by a business in columns of Debit and Credit.
If a ledger has a debit closing balance, the amount of closing balance of that ledger is placed in the debit column, whereas the amount of closing balance of ledgers having credit balances is placed in the credit column. According to the accounting equation, the total of the debit column shall be equal to the total of the credit column of the trial balance. Thus by comparing both columns, Trial Balance helps to ensure that every debit has a corresponding credit entry. In case the total of both debit and credit columns of the trial balance is not in agreement, the matter needs further exploration for the reason of the disagreement.
One possible reason can be an arithmetic error while calculating the total of both columns. However, if the totals of both columns are correct, there might be possible errors in the accounting records.
The above-stated controls are two examples out of many controls implemented by the business organizations in order to reduce the chances of errors while recording and presenting financial information. However, despite all these efforts chances of potential errors remain, because many types of errors may not be identified by the above-stated controls.
For example, the salesman forgot to record a sale into the system resulting in the complete omission of an accounting entry from recording into the records. Since the impact was omitted from the both debit and credit side, the trial balance remains in agreement.
Therefore it is important that accountants have a thorough knowledge of what accounting errors are? and how are these errors identified and rectified?.
The purpose of rectification of error is to ensure the following:
- Correct accounting records being maintained by the business
- Accurate performance of the business is being reported e.g. profit and loss statement
- True financial position and status of business affairs are being exhibited
In the coming sections, we will read various types of errors and how each type of error is rectified.
