Accounting Errors: Types and How to Avoid

Accounting errors can affect a business’s financial integrity and cause costly mistakes. Whether it’s a simple transposition error or a more complex omission, these inaccuracies can lead to misleading financial statements, tax issues, and misinformed decisions. The positive side is that most accounting errors can be avoided with the right strategies and tools in place. By understanding these errors and how to prevent them, you can ensure the accuracy of your financial records and avoid the pitfalls that could affect your business, and this is what you’ll learn from this article.

What is an Accounting Error?

An accounting error is an error that occurs when recording, calculating, or reporting financial transactions. These errors can occur for various reasons, such as incorrect data entry, misinterpretation of financial information, or failure to adhere to established accounting standards. Accounting errors can have significant implications, leading to inaccurate financial statements, tax issues, or misleading business performance reports. These errors are often categorized as errors of commission, omission, or principle, and they can be detected and fixed through audits, reviews, or reconciliation processes.

Transposition Error

A transposition error occurs when two consecutive numbers in a sequence are mistakenly swapped or reversed. An accountant or a bookkeeper may mistakenly enter $152 instead of $125. This sort of error impacts financial calculations, leading to imbalances in accounting records.

Example

A company records sales revenue of $1,523 instead of the correct $1,532. Due to this transposition error, the revenue is understated by $9.

Read More: Transposition Error: Definition, Example, And How To Correct

Omission Error

An omission error occurs when a number or piece of information is accidentally left out of a sequence or calculation. There are two types of omission errors:

• Complete Omission: This error occurs when the whole transaction is omitted from the accounting records.
• Partial Omission: This occurs when only a part of a transaction is recorded.

Examples:

Complete Omission Error Example:

A company purchases office supplies worth $500 but does not record the transaction at all. The accounts payable balance here is understated, and the office supplies expense is missing, affecting both the balance sheet and income statement.

Partial Omission Error Example:

A company purchases office supplies for $500, but only $300 is recorded as an expense, leaving $200 unaccounted for. The expense here is understated by $200, and the balance sheet reflects a lower liability or asset.

Read More: Omission Error in Accounting: Definition, Examples, And How To Avoid

Rounding Errors

A rounding error occurs when a number is approximated to a nearby value with fewer or larger decimals than the original, typically due to limitations in precision. This can lead to slight inaccuracies in calculations, especially when the error accumulates over multiple operations.

Example

A company calculates VAT at 5% on a sale of $1,234, but instead of calculating $61.70, it rounds it to $62. The VAT payable here is overstated by $0.30, creating a small discrepancy in the financial records.

Read More: Rounding Error in Accounting: Definition, Examples, And How To Correct

Error of Principle

An error of principle is an error that occurs when an entry violates a general accounting principle or an established accounting principle by an organization. This error occurs when a transaction is recorded misapplying an accounting principle or applying the wrong one.

Example

A company buys a piece of machinery worth $5,000 and records it as an expense in the profit and loss account instead of capitalizing it as an asset. The expense here is overstated, and the balance sheet is misstated, as the machinery should have been added to the assets.

Read More: What Is An Error Of Principle? Examples And How To Correct

Error of Commission

This type of error occurs when an accountant incorrectly records a transaction by entering an incorrect amount, account, or details without violating the transaction's general nature or categorization. This can involve recording the correct amount in the right account but posting it to the wrong ledger or entering the wrong amount in the correct account.

Example

A company sells goods worth $1,000, but the amount is mistakenly recorded as $100. The sales revenue here is understated by $900, and this affects the profit calculation.

Read More: Error of Commission: Definition, Examples, and How To Avoid

Error of Duplication

Duplication errors occur when a value, element, or action is accidentally duplicated more than once in a sequence or calculation. This results in inaccurate results or overrepresentation of data, which frequently causes discrepancies or inaccuracies in the final outcome.

Example

A $500 rent payment is recorded twice in the accounts payable ledger. The rent expense is overstated by $500, and the accounts payable balance is also incorrect.

Transcription Error

A transcription error occurs when information is incorrectly copied or recorded, often due to human mistakes, such as miswriting, mishearing, or typographical errors. This leads to discrepancies between the original data and the recorded version.

Example

A customer payment of $2,000 is written as $20,000 in the cash receipts journal. The cash balance is now overstated by $18,000, and the customer account shows an incorrect balance.

Compensating Errors

These are errors that occur when one mistake in the financial records is offset by another mistake of equal value, thus canceling out the overall effect on the financial statements.

Example

A company mistakenly overstates both its revenue by $500 and its expenses by $500. There is no effect on the profit or loss, as the errors balance each other out. However, the financial statements are still inaccurate.

Error of Original Entry

This occurs when an incorrect amount is recorded in the journal or ledger from the beginning before any further accounting processes take place. The original entry itself is incorrect and causes an error in the financial records.

Example

A company records a purchase of equipment for $1,000 as $10,000 in the journal. The accounts payable is now overstated by $9,000, and the equipment account is also incorrect.

Subsidiary Entries

These are errors that occur in the subsidiary ledgers, such as accounts payable, accounts receivable, or inventory ledgers, which should match the control account in the general ledger. If the subsidiary entry does not match the control account, this creates discrepancies between detailed accounts and summary accounts.

Example

In the accounts payable subsidiary ledger, a transaction of $2,000 is recorded as $1,500. The subsidiary ledger is inaccurate, and the accounts payable control account in the general ledger does not match the subsidiary ledger.

Wrong Account

This error happens when a transaction is recorded in the wrong account, even though the correct amount is entered. The transaction is placed in an inappropriate account category.

Example

A payment of $500 for electricity is recorded in the "Office Supplies" account instead of the "Utilities" account.

Disorganized Record Keeping

This refers to errors that arise when financial records are not properly organized, stored, or classified. It can lead to missing documents, difficulty in tracing transactions, and improper recording of financial information.

Omitting Transactions

Omitting transactions refers to the failure to record one or more transactions entirely or partially in the accounting records. This error leads to inaccurate financial statements, as the business’s financial position is not fully represented.

How To Avoid Falling in Accounting Errors

To avoid falling into accounting errors, businesses should implement various strategies, best practices, and controls to ensure the accuracy and reliability of their financial records. Here are key steps to avoid accounting errors:

Implement Robust Internal Controls

Ensure that different people handle different aspects of accounting, this reduces the risk of errors and fraud. Implement a process where all transactions are reviewed and approved before being recorded. Regularly reconcile bank statements, accounts receivable, accounts payable, and other key accounts to identify discrepancies quickly.

Use Reliable Accounting Software

Use accounting software that automates calculations (e.g., VAT, depreciation) and helps prevent errors in data entry. Keep the accounting software updated to ensure it reflects the latest tax rates, regulations, and features to reduce manual errors.

Read Also: 6 Reasons that Shows You Why to Use Online Accounting Software

Maintain Clear and Organized Record Keeping

Organize physical and digital documents (invoices, receipts, contracts) in a logical, easy-to-navigate system. Regularly back up your accounting data to prevent loss of information in case of system failures. Ensure that each transaction has clear supporting documentation to provide clarity and traceability.

Train Employees and Accountants Regularly

Provide continuous training for accounting staff to stay up to date on best practices, new accounting standards, and software updates. Ensure employees understand key accounting principles and regulations to avoid errors like errors of principle or misclassification.

Double-Check Data Entries

Always review financial data and journal entries before finalizing them in the records. Reconcile subsidiary ledgers (e.g., accounts payable, accounts receivable) with general ledger control accounts to detect discrepancies early.

Perform Regular Audits and Reviews

Regular internal audits can help identify any accounting errors, fraud, or inefficiencies early on. External auditors can offer an objective review of the financial records, ensuring they are accurate and compliant with applicable standards.

Conduct monthly reviews of financial statements to identify and correct errors early (e.g., compare budgeted vs. actual results). Compare actual financial results to the budget or forecast to identify any unusual discrepancies that may indicate errors.

How Enerpize Can Help in Avoiding Accounting Errors

Enerpize offers an array of features that can significantly reduce accounting errors, enhance financial management, and ensure accuracy. Here’s how Enerpize can help businesses avoid common accounting errors:

Manage Finances More Effectively

Enerpize provides a comprehensive, user-friendly platform to manage your finances. It organizes transactions, expenses, and income systematically, reducing the chance of errors from missing or misclassified data. Clear categorization and detailed tracking of financial activities minimize omissions, wrong account entries, and miscalculations.

Automate Accounting Processes

Many accounting processes, such as posting journal entries or generating tax reports, are automated with Enerpize. Automation reduces manual input errors like transposition, misclassification, and manual calculation mistakes.

Simplify Tax Compliance

This online accounting software allows you to easily calculate taxes (like VAT and sales tax), issue tax reports, and ensure compliance with local tax laws. With tax rates and calculations automated, there’s no risk of incorrect tax entries or errors in tax reporting.

Improved Accuracy

The software reduces human error by offering automated features like tracking income and expenses with vouchers, journal entry integration, and real-time reporting. With features that automatically generate and track entries, it ensures your financial records are accurate.

Enhanced Accessibility

Enerpize is a cloud-based solutions that allow you to access your financial data from anywhere, at any time. This centralization reduces the chances of disorganized record-keeping or missing transactions.

Data Security

With secure cloud-based storage, Enerpize ensures that all sensitive financial data is protected from loss or tampering. The system keeps track of changes to ensure any error can be traced back and corrected.

Run a Seamless Accounting Cycle

The customizable accounting cycle allows you to automate tasks like purchase, sales, payroll, and cheque transactions. This flexibility ensures that each step in your financial workflow is followed without skipping any necessary actions.

Display Professional, Accurate Reports

The system allows you to view detailed financial transactions and generate various reports like balance sheets, income statements, and trial balances. These reports are automatically updated with accurate data, ensuring precise financial reporting.

Key Takeaways

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• Defining Accounting Errors: These are inaccuracies that occur while recording, calculating, or reporting financial transactions. They can lead to misleading financial statements, tax issues, and poor business decisions.
• Types of Accounting Errors: Transposition, Omission, Rounding, Principle, Commission, Duplication, Transcription, Compensating, Original Entry, Subsidiary, Wrong Account, Disorganized Record Keeping, Omitting Transactions.
• Preventing Accounting Errors:
  • Internal Controls: Implement checks and approvals for transactions, and conduct regular reconciliations.
  • Accounting Software: Use reliable software to automate calculations and reduce data entry errors.
  • Organized Record Keeping: Maintain clear, organized documentation for all transactions.
  • Employee Training: Ensure accounting staff are well-trained on accounting standards and software.
  • Double-Check Entries: Review financial data before finalizing records and reconciling ledgers.
  • Regular Audits: Perform internal and external audits to catch errors early.