Error in accounting incurs as a result of the wrong entry recorded by bookkeeper or accountant. There are different types of errors in accounting; some of them can result in an imbalance of trial balance. Error is considered as an unintended mistake during the course of recordkeeping. Typically, material errors would lead to incorrect decision making by the user on the basis of the financial statements that contain such errors.
What is Error in Accounting?
Error in accounting or accounting error is the omission or misstatement in the financial statements. Material errors are the omission or misstatements that could lead or influence the decision making of the users of financial statements either individually or collectively.
Accounting errors normally discovered through mathematical mistakes, mistakes from applying accounting policies, misinterpretation of facts of transactions, lack of oversights, and fraud.
Types of Error in Accounting?
There are several common types of errors in accounting. These are errors of transposition, omission, principle, commission, compensating errors, errors of original entry, errors of reversal entry as well as other types of errors. We will cover in detail for each of the accounting errors below:
Errors of Transposition
The errors of transposition are one of the accounting errors that incur as a result of the wrong digit of the number has been accidentally recorded the other way round. This error would lead to the unequal double entry.
For example, suppose that the sales revenue is recorded in the sales revenue account as $5,654; however, it is recorded on accounts receivable as $5,645.
From the above example, the error is the transposition of 5 and 4. Thus, this kind of error would lead to the unequal of debit and credit sides. Typically, we can detect such errors by taking the difference between debits and credits and divide it by 9. If such difference can be divided exactly by 9, the error would be the errors of transposition.
Errors of Omission
It is one type of error in accounting. These errors occur as a result of failing or omitting to record a transaction at all or mistakenly record the debit or credit not corresponding to its double entry.
So, we have two cases here. The first one is the whole transactions are missing from the accounting record. While the second one is the debit and credit side is not corresponding to the double-entry of the transaction.
Below are the examples for these two cases:
1. If ABC Co received an invoice from the supplier for $500. This invoice has been omitted from the accounting record entirely. That’s mean the bookkeeper or accountant forget or fail to record this transaction in the book. Therefore, the total debits and credits of the company are out or omitted by $500.
2. If ABC Co received another invoice from its supplier for $450, the accountant posted it into the payable control account on the credit side. However, the debit entry has been omitted in the purchase account but recorded in another account instead.
Errors of Principle
This is one of the accounting errors where transactions have been recorded in accordance with the double-entry at the correct amount. However, subsequently, such transactions are not in compliance or in accordance with the applicable rule or accounting principle or concept.
For instance, ABC Co has recorded the repair of non-current assets as capital expenditure increases the value of the non-current assets. Instead, such repair should have been treated as revenue expenditure and record as repair expense in the profit and loss account.
Errors of Commission
The errors of commission are other accounting errors where the bookkeeper or accountant mistakenly or erroneously recorded transactions in the book. The errors of the commission have two types as follow:
- Record the debit or credit entry of transactions in the wrong account. For instance, the accountant erroneously recorded utility expenses to office rent for $150. This results in understating the utility expense account and overstating the office rent account for the same amount.
- Error of casting: The casting here refers to the adding up of amount. For instance, the daily cash transaction in the cash daybook has been incorrectly added up as $25,250 while it should have been at $25,550.
Compensating Errors
Compensating errors are other types of accounting errors where such errors are coincidentally equal and opposite to one another. This means that two or more errors have occurred and those errors canceled each other; thus the total debits and credits remain the same.
For example, a utility bill of $1,500 has been debited to the utility expense account as $1,700. On the other hand, the casting error of the sales accounts resulted in the overstating of sales by $200. These two errors cancel each other out and the trial balance remains at the same amount both debit and credit.
Therefore, the compensating errors possible overlook without properly casting and review as the trial balance is still balance.
Errors of Original Entry
The errors of the original entry are one of the accounting errors where the double-entry has been correctly recorded but at the wrong amount.
For example, the credit sales of $5,670 have been recorded as $5,760. Both debit which is accounts receivable and credit, sales revenue, has been recorded as $5,706. This results in the overstatement of both credit sales and accounts receivable of $90.
Reversal of Entries
This is another accounting error where the transaction has been recorded at the correct amount; however, that transaction has been recorded on the wrong side.
For instance, cash sales of $2,500 have been recorded on the debit side and credited to bank account.
Other accounting errors
There are also other errors as follows:
- Single-sided entry: This is where only one side has been recorded, either debit or credit.
- Different values on the debit and credit sides have been recorded.
- Two entries have been recorded on the same side.
- Miscasting: This is where incorrect addition has been carried out to each individual account.
- The error as a result of extracting the trial balance. This is called extracting error. This error results in the difference between balances in the trial balance from the relevant account.
- The opening balance of certain accounts has not properly carried down or at the wrong amount.
Summary
The accounting errors, then, can be divided into two main groups; the errors where the trial balance still balances and errors that cause the trial balance imbalance.
| Errors where trial balance still balances | Errors where trial balance does not balance |
|---|---|
| Errors of commission | Errors of transposition |
| Reversal entries | Single-sided entry |
| Errors of principle | Different value of debit and credit |
| Compensating errors | Two entries on the same side |
| Errors of original entry | Miscasting |
| Errors of omission | Extracting errors |
| Errors of carrying down the opening balance |
