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Accounting is essential for running any type of business. With the help of accounting, a company can keep its financial activities organised and transparent. Business owners can simply track their income, expenditure and profits. It can also help in filing taxes. With accurately maintained accounts books, businesses can plan better, control costs and build trust with banks and investors. We can say that, accurate accounting is considered the backbone of every successful business. But sometimes, despite best efforts, errors in accounting may occur due to several reasons, such as human error, lack of experience or system limitations. If these errors are not identified and corrected in time, they can complicate your account books, which can lead to compliance issues.
In this blog, we explain all types of accounting errors, their impact on overall accounting and why professional accounting support is crucial for businesses.
Common accounting errors can affect the financial accuracy and decision-making of a business. Errors in accounting refer to unintentional mistakes made while creating an entry in the financial books. These errors may occur due to duplicate entries, missing invoices, data entry errors, etc. These errors are different from fraud, as they are committed unintentionally.
Error of Omission - Error of omission occurs when a financial transaction is either completely or partially not recorded in the account books.
Example: Suppose a company is paying ?20,000 as office rent but forgets to record the payment in the cash book. As a result, the expense is not recorded, which will reduce the expenses and increase the profits.
Error of Commission - The other type of accounting error is error of commission, this occurs when an entry is recorded incorrectly in the accounts books. This usually happens due to wrong posting, incorrect amount or entries made in the wrong account.
Example: If ?5,000 received from Mr. Raj is mistakenly credited to Mr. Raja’s account, the transaction is recorded but in the wrong personal account. This is an error of commission.
Error of Principle - Error of principle occurs when accounting rules are not followed while making entries in the account books. In such cases, the amount is recorded correctly, but is classified under the wrong account.
Example: A company purchase a printer for office use worth ?35,000 and makes the entry as an office expense instead of a fixed asset.
Compensating Error - Compensating error is another type of accounting error that occurs when two or more errors cancel out the effect of each other, which results in no difference in the trial balance. Mistakes still exist but remain undetected because their combined impact balances the accounts.
Example: If the sales account is overstated by ?30,000 and at the same time, the purchase account is overstated by ?30,000, then both errors cancel each other’s effect.
Error of Duplication - The most common types of accounting error is the error of duplication. This error usually occurs when the same transaction is recorded twice or more in the account book.
Example: The entry of a payment of ?12,000 to a supplier is entered twice in the accounts, which results in an increase in expenses.
Error of casting - Error of casting is one of the types of accounting errors that occurs when there is a mistake in adding or totalling figures in an account book. In such cases, the individual entries are done correctly, but the final total is calculated incorrectly.
Example: If the total of a purchase column is added as ?62,000 instead of the correct ?26,000, it is an error of casting.
Error of posting - Error of posting is that type of accounting error in which a transaction is recorded correctly in the journal entry but is posted incorrectly while making an entry in the ledger. This may occur either by posting to the wrong account or posting the wrong amount.
Example: A purchase worth ?15,000 from a supplier is correctly recorded in the purchase book but is posted as ? 5,000 in his ledger account.
Error of carry forward - Another type of accounting error is the error of carry forward. This type of error occurs when the balance is incorrectly carried forward from one accounting period to another or from one page to another in the accounts books.
Example: If the cash balance of ?18,500 at the end of March is wrongly carried forward as ?15,800 in the cash book for April, then it will be treated as an error of carry forward
Error of recording - Error of recording is among the common types of accounting error that occurs at the initial stage of accounting. These errors arise before posting to ledger accounts, usually due to wrong data entry or a misunderstanding of the transaction.
Example: A credit sale recorded as a cash sale.
Error of balancing - Error of balancing occurs when a balance of an account is calculated incorrectly while closing the ledger. This may happen because of mistakes in adding either the debit or the credit sides of the accounts.
Example: If an account has a debit total of ?40,000 and a credit total of ?28,000, then the correct balance should be ?12,000, but if it is wrongly calculated as ?21,000, then it will be treated as an error of balancing.
Accounting errors can significantly affect the financial health of a business. This may lead to incorrect profit and loss figures, mismanagement in cash flow and wrong decisions. Taxes can also be affected while calculating, which results in penalties and compliance issues. Inaccurate records reduce the reliability of financial statements and make it difficult to gain the trust of investors. In short, the unresolved accounting errors can harm the credibility of the business.
Prepare and review the trial balance: A trial balance helps in identifying the posting errors, numerical errors and errors of balancing.
Perform bank reconciliation statements: The regular bank reconciliation statements or called as BRS, help in detecting the missing entries, duplicate transactions or any incorrect cash balances.
Conduct Ledger scrutiny: Periodic assessment of ledger accounts helps in identifying any wrong postings or any type of misclassification of income or expense.
Verify Subsidiary books: Carefully check the totals of various subsidiary books like sales book, cash book, and purchase book.
Compare the financial statements: Compare the financial statements yearly and budget vs actual data. This will help in detecting any unusual variation, which may indicate accounting errors or areas that need to be reviewed.
Use Audit trails and vouchers: Supporting documents like invoices, receipts and vouchers, etc., should be checked regularly.
Internal and external Audit: With the help of professional audits, various types of accounting errors can be detected.
Implement strong internal controls: Duties can be segregated, aiming to reduce the risk of fraud and errors
Use of accounting software: Various accounting software can help in reducing manual entry errors, calculation mistakes or any duplication of entry.
Training of accounting staff: The training of accounting staff should be done on a regular basis. This can ensure the proper understanding of accounting principles and updated laws regarding tax and GST.
Professional accounting support: Taking the help of professional accounting firms can help in maintaining accurate account books. This can reduce the risk of errors and other penalties.
Together, these practices will help in maintaining accurate records, which will strengthen the business.
Understanding the different types of accounting errors will help you learn about the mistakes that occur in the process while maintaining the account books. Regular checks, such as trial balance review, can be helpful in detecting errors, whereas other complex errors can be detected only through a detailed investigation. For this, you have to connect with an account professional who will help you in detecting and correcting the errors in a detailed and accurate way.
If you are looking for error-free, reliable, and accurate accounting support, you can partner with an experienced accounting firm like Lekhakar. You can rely on their experienced team of Chartered Accountants, financial advisors, accountants and advocates for your accounting needs. The team is well-versed with the latest accounting software like Zoho, Tally, Oracle, Cloud-based software, Sage 50, Sage 100, etc.
