Financial AccountingTypes of Accounting Errors

Types of Accounting Errors

Types of Accounting Errors
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There are various types of accounting errors that may occur while recording Financial information resulting in a misleading representation of financial information. Accounting Errors can occur due to different reasons, including negligence, lack of knowledge and understanding, due to unavailability of complete information, and merely by mistake. These errors can be classified as their effects on the agreement of trial balance or the nature of their occurrence.

Common Types of Accounting Errors:- 

The errors occurred while entering and updating accounting records due to human errors either intentionally or by mistakes. For example, the wrong amount is recorded due to a wrong calculation or amount entered in one account instead of the other. 

Clerical errors can be further subdivided into the following categories:

Error of omission 

The error of omission occurs when the amount whether complete or partial is omitted from recording into the books of accounts. There can be two possible ways in which errors of omission can occur.

It is possible that a complete transaction is omitted from being recorded in the books of accounts. For example, a cash sale to Mr. A for $ 500 was not recorded in the sales day book and ultimately the amount of this transaction was not included when sales-daybook was posted in the general sales ledger and cash book. If the complete transaction was omitted while posting into ledgers, such errors will affect both sides of the trial balance, as both the debit and credit side of the transaction was not recorded hence leaving any effect on the trial balance. Therefore complete remission of a transaction is called a two-sided error of omission and is difficult to identify.

Two-sided errors of omissions are difficult to prevent, however, controls can be developed to identify and correct such errors from an occurrence. For example; 

There should be a process of carrying on periodic reconciliations with third parties like customers, banks, and suppliers. 

Reconciling control accounts with its subsidiary accounts. 

It is possible that only one side of a transaction is recorded in the books of accounts. For example, In the above example of Cash sales of $ 500 to Mr. A, the accountant while posting the sales day book, only posted the debit entry of cash received in the cash book while forgetting to post $500 in the sales ledger thus omitting the credit entry of the transaction. Omission of one entry while posting a transaction results in disagreement of the trial balance and is called a one-sided error of omission.

Transposition error 

This type of error occurs when digits of any amount are recorded in the wrong sequence by mistake. For example, instead of recording 445,  454 were recorded into the books. 

The error may occur on the complete transaction level in which case a two-sided error of transposition will occur. For example, the salesman erroneously recorded the sales of $ 636 to Mr. A as $ 663 on the sales day. The wrong entry in the day book will result in carrying the error into both (debit and credit ) sides of the ledgers and will not affect the agreement of the trial balance.

Similarly, it is possible that while posting from daybooks to the ledger the correct amount in one ledger, while recording the transposed amount into the counter ledgers. For example in the above illustration of sales to Mr. A for $ 636, the recording in the sales daybook was correctly made, however, while posting the amount in the sales ledger, the correct amount of $ 636 was entered into the credit side but the $ 663 was recorded in the debit side of the Receivable Control Accounts. Since the error occurred only on one side of the accounts, it will be denoted as a one-sided transposition error. Like every other one-sided accounting error, a one-sided transposition error will result in the disagreement of trial balance. 

The error of the Original Entry

If a complete transaction was posted with the wrong amount, the error of the original entry will occur. In this type of accounting error, the correct rule of accounting entries is followed but wrong amounts are posted into the ledgers. This could happen due to many reasons including negligence or mistake by the person entering the data or missed calculation at the source document e.g. invoices, bills and purchase orders, etc.

Error of commission

This type of error usually happens when the complete accounting entry with the correct amounts was recorded into the wrong subsidiary ledger accounts. For example, credit sales of $500 to Mr. A were correctly posted to Sales and receivable Ledger Control accounts but instead of posting a credit entry to Mr. A, Mr. B was credited in the subsidiary ledger account. 

Since correct amounts on the correct debit and credit side were posted, the error of commission will have no result on the agreement of the trial balance and may remain undetected by the preparation of the trial balance. 

The error of commission can only be identified upon the reconciliation of ledgers. Businesses and their auditor send the accounts balance of customers and suppliers for verifications. Any difference identified in the confirmation process shall be examined to identify any error of commission.

Complete Reversal of Accounting Entries

In such types of errors, correct amounts are posted into correct accounts but on the wrong side of the account. For example, credit sales made to Mr. A for  $100 were incorrectly recorded in the credit side of the Receivable Control Account and subsidiary account of  Mr. A and the debit side of the sales ledger account in the general ledger.

The amount of above-stated accounting entries in both ledgers is balancing each other therefore such type of error will have no effect on the trial balance.

Compensating Errors

Compensating errors are the group of one-sided errors with a net effect of zero. The amounts of each error within the group will compensate each other and resultantly there is no effect on the agreement of trial balance and the total of both debit and credit columns will be the same. Unlike the error described above, compensating is not a single error but a group of different errors.

Compensating errors are also called self-balancing errors as one error is compensated with the other or a group of errors with opposite natures. This error is further explained by the example below;

For example, sales made to Mr. A for $200 were erroneously recorded as $450 on the credit side of only the Sale ledger Account resulting in the overstatement on the credit side of $250. 

On the other hand  

-Electricity expenses of $50 were entered as $150 on the debited side expense account resulting in a Debit overstatement of $100. 

-Moreover, overtime expenses paid for $150 were wrongly recorded on the credit side in the cash book/ledger as $50 resulting in credit understatement. 

In the above example, a credit overstatement of $ 250 was compensated by the debit overstatement for $100 of Electricity expense and credit understatement of $ 150, resulting in nil effect on the agreement of trial balance. 

Since compensating errors are composed of a pool of errors therefore with opposite effects, there will be no impact on the agreement of trial balance which makes it difficult to be identified by preparation of Trial Balance. Periodic reconciliation and consistent reviews by a senior accounting supervisor can help to timely identify and correct such errors.

Error of Principle

So far we have read about clerical errors which may occur due to the negligence of an accountant with the intentions of fraud or are merely a result of a mistake.

There is another type of error, which may happen due to the weak knowledge of the person recording the accounting entries for accounting practices and principles. Errors of Principles are the errors which are resulted due to the wrong use of the classification of accounts. The major reason for such errors is not having sound knowledge of the matching concept of accounting. This error usually occurs by recording capital expenditure as a revenue expense and vice versa. 

For Example, the purchase of an asset was wrongly recorded in the repair and maintenance expenses of machinery. 

Since correct amounts and proper rules of debit and credit were followed while making the error of principle, there will be no effect on the agreement of trial balance. However, the occurrence of an Error of principle will cause misleading reporting of the Balance sheet and Profit and Loss statements.

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