Accounting Errors
An accounting error is an error committed in the field of accounting which was made unintentionally. After the detection of the error or the mistake it must be immediately fixed else it will further hamper the financial statements with wrong data. An investigation is conducted if immediate rectification is not assured.
The accounting errors are not to be mistaken with fraud, as fraud is an intentional act to hide or alter the data in order to do wrong or gain illegal benefit from the firm. There are numerous types of errors, while the most common accounting errors are the clerical ones or the errors of accounting principle.
Types of Errors in Accounting
In the accounting system, there are types of errors in Accounting which is to be classified as:
Subsidiary Entries
Subsidiary entries are the transactions which are recorded incorrectly. This type of mistake is detected by a proper bank reconciliation.
Error of Omission
An error of omission occurs when the accountant skips a transaction in the books. He may forget to enter the respective invoice related to the sale transaction made for the sale of a service.
Transposition Errors
This happens when two digits are reversed or transposed, this error is created in the books. Yet simple error but completely disturbs the accounting system.
Rounding Errors
Rounding of a figure will make the accounting inaccurate and make a series of errors in future. This mistake is made by the accountant or even by the accounting software.
Errors of Principle
A transaction that occurred due to incorrect usage of accounting principle is called an error of principle. These errors of principle don’t meet the generally accepted accounting principles abbreviated as GAAP. This type of error is also called an input error because even with the correct figure amount the recording is done in an incorrect account.
Errors of Reversal
When an entry is debited instead of crediting the entry, or the vice versa results, this is called an error of reversal.
Errors of Commission
An error of commission occurs when the amount is entered right and also in the correct account but the value accounted for it is wrong–like it is subtracted instead of being added or vice versa.
Types of Errors in Auditing
The auditors should be very mindful and careful about the detection of the accounting errors as manipulating the accounting may also appear as error or this may be a result of sheer carelessness on the side of the bookkeeper.
Auditing Errors May Be Broadly Classified As Follows
Error of Principle
In this type of error, the recording of the items of transactions are not done according to the Principle of Accounting, this is known to be an error of principle. The error of Principle cannot be tracked down or is not traceable, but this continues to exist, the errors are also committed unintentionally or even for the purpose of manipulation of accounts in order to inflate or deflate the profit amount.
Errors of Omission
There are two types of errors of omission of entry while recording the transactions in the books of accounts:
At the time when a transaction is totally omitted from the books of accounts, it will leave the trial balance unaffected and the detection of such error is difficult.
Other is the type when the transaction is partially omitted from the books of accounts
Errors of Duplication
An error of duplication is very difficult to detect. This might be detected with proper and acute observation of accounts, for example, the purchase may be recorded twice with the original and duplicate copy of the purchase of invoice, which is possible to post the total of any ledger account twice in the trial balance.
Errors of Commission
An error of commission occurs when the entry is made in the books of the original entry or in the ledger account is a wrong way.
Compensating Errors
At times an effect of error compensates with the effect of another error, this is known to be a compensating error, this does not affect the trial balance.
FAQs on Types of Errors in Accounting and How to Resolve Them
1. What are the primary types of errors found in accounting?
Accounting errors are broadly classified into four main categories based on their nature:
- Errors of Principle: Occur when a transaction is recorded against the fundamental principles of accounting, like treating a capital expenditure as a revenue expenditure.
- Errors of Omission: Happen when a transaction is either completely or partially left out from the books of accounts.
- Errors of Commission: Involve incorrect recording of transactions. This can be a wrong amount, wrong posting, incorrect totalling, or wrong balancing of an account.
- Compensating Errors: These are a set of two or more errors that cancel out the effect of each other, so the trial balance still tallies.
2. What is the difference between an error of commission and an error of omission?
The key difference lies in whether a transaction was recorded or not. An error of omission means a transaction was completely or partially forgotten and was not entered into the books at all. In contrast, an error of commission means the transaction was entered, but incorrectly. This could involve using the wrong amount, posting to the wrong person's account, or making a calculation mistake.
3. Can you explain what an 'Error of Principle' is with a real-world example?
An 'Error of Principle' is a fundamental mistake where a transaction is recorded without observing the Generally Accepted Accounting Principles (GAAP). This error does not affect the agreement of the trial balance but leads to a misrepresentation of financial statements. For example, if a company purchases new machinery for ₹50,000 (a capital expenditure) but records it in the 'Repairs and Maintenance' account (a revenue expenditure), it is an error of principle. This incorrectly reduces the reported profit and understates the company's assets.
4. How do compensating errors work, and why are they a concern if the trial balance tallies?
Compensating errors are two or more independent errors that cancel out each other's financial impact. For instance, if a purchase from 'Supplier A' for ₹1,000 is wrongly debited as ₹100 (an understatement of ₹900), and a separate payment to 'Supplier B' of ₹100 is wrongly debited as ₹1,000 (an overstatement of ₹900), the net effect on the trial balance is zero. They are a major concern because the trial balance agrees, giving a false sense of accuracy. However, the individual ledger accounts for both suppliers are incorrect, which distorts the true financial position and performance of the business.
5. What is the fundamental difference between an accounting 'error' and 'fraud'?
The fundamental difference between an accounting error and fraud is intent. An accounting error is an unintentional mistake made during the recording or processing of transactions. It arises from carelessness or a lack of knowledge. In contrast, fraud is a deliberate act to misrepresent financial information for personal or corporate gain. While errors are corrected through rectification entries, fraud involves deception and can have serious legal consequences.
6. How does the 'Rule of 9' help accountants detect transposition errors?
The 'Rule of 9' is a quick mathematical trick used to identify potential transposition errors. A transposition error occurs when the digits of a number are interchanged (e.g., writing 72 instead of 27). The mathematical property is that the difference between the original number and the transposed number is always divisible by 9 (e.g., 72 - 27 = 45, which is divisible by 9). If the debit and credit columns of a trial balance do not match and the difference is perfectly divisible by 9, accountants often suspect a transposition error as the first possible cause.
