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

Reviewing your financial records to discover accounting errors that are difficult to sort can be a challenging issue. One common issue that can cause these discrepancies is the error of commission, where financial transactions are recorded with mistakes in amounts, accounts, or other details. While the transaction type remains correct, the inaccuracies can still result in serious issues like underpayments, overpayments, or reporting errors. This article will help you ensure your financial records remain accurate and reliable by understanding this type of financial error.

What Is the Error of Commission In Accounting?

In accounting, an error of commission definition refers to a mistake made while recording financial transactions, resulting in an inaccurate entry but still recording the transaction type in the correct category.

This type of error occurs when an accountant or bookkeeper 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.

How To Find Errors of Commission

Errors of commission are common mistakes in commission calculations, often seen in contexts like sales, finance, and trading. To detect these errors, you should follow these steps:

Review the transaction details and system inputs

Check all the transactions involved and confirm the correct rates and values have been applied. This includes validating the agreed-upon commission percentage or fee.

Review the data entry or software configurations to ensure they are correct. Often, errors of commission stem from incorrect system configurations, such as wrong commission percentages, tax rates, or transaction amounts.

Compare commission amounts

Calculate the expected commission based on the transaction amounts and rates. Compare this calculated value to the amount actually charged or paid. Also, compare recent commission calculations to previous ones to spot any deviations in patterns or inconsistencies.

Audit the process

Look for patterns or systematic errors in how commissions are being calculated and paid. This might involve checking for issues in commission schedules, tax laws, or policy changes.

Error of Commission Examples

There are several scenarios and causes for an error of commissions. Here are  a few examples that will help you better understand:

Accounting Error in Payroll

An accountant is processing payroll for a company. Instead of entering the employee’s hourly wage of $15 per hour, they mistakenly enter $50 per hour.

Correct pay for 40 hours worked:
40 hours x $15/hour = $600

Incorrect pay with an error of commission:
40 hours x $50/hour = $2,000

Error: The employee is overpaid by $1,400 ($2,000 - $600).

Inventory Miscount

A warehouse worker is responsible for counting inventory. They miscounted the number of items in stock. Instead of counting 120 items, they mistakenly counted 150 items.

Correct number of items: 120

Incorrect count: 150

Error of commission: They report having 30 extra items than what is actually in stock.

Impact: The company may overestimate their available inventory, which could lead to issues like overselling products.

Sales Tax Miscalculation

A cashier is processing a sale of a product priced at $200. The correct sales tax rate is 8%, but the cashier accidentally uses a tax rate of 10%.

Correct tax: $200 x 8% = $16

Incorrect tax with error of commission: $200 x 10% = $20

The customer is charged an extra $4 ($20 - $16) in sales tax.

In each case, an action was performed incorrectly, leading to a financial or operational mistake due to an error of commission.

What is The Difference Between Error of Commission and Omission?

In accounting, maintaining accuracy is crucial for producing reliable financial records. However, mistakes are inevitable, and understanding the different types of errors is key to addressing them effectively. One common point of confusion is the distinction between error of commission vs omission. While both types of errors can lead to inaccuracies, they occur in different ways and have unique impacts on financial statements.

Key Differences Between Error of Omission and Commission

How To Correct an Error of Commission?

Once you’ve identified an error of commission, your next step is to correct the error by following these steps:

1- Identify the source of the error

Determine whether the error is due to incorrect input, miscalculation, system malfunction, or human error.

2- Correct the calculation

If it's a simple miscalculation, recalculate manually or use corrected formulas. Ensure that the relevant transaction amounts are accurate.

3- Adjust the records

If the error is identified after payments or accounting records are made, update the records to reflect the correct value. This may involve issuing a corrected invoice or adjusting the payment.

Read Also: Adjusting Journal Entries: Definition, Types, and Examples

4- Communicate with the affected party

If the error affects a salesperson, partner, or client, communicate the correction and ensure that any overpayments or underpayments are handled.

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

How Can You Avoid Errors of Commission?

To prevent errors of commission, it's essential to establish robust processes and practices that ensure accuracy in calculations and bookkeeping. By taking proactive steps, businesses can minimize the risk of mistakes and maintain fairness in compensation. Below are some tips to consider to avoid these errors:

Set clear guidelines

Establish clear and thorough guidelines regarding structures, payment terms, and calculation methods. Ensure all parties are aware of these policies.

Automate calculations

Use reliable software or systems to automate calculations and bookkeeping. This reduces human error and ensures consistency in calculations.

Double-check the values

Always verify that the values, fees, and percentages are accurate before making any calculations or payments.

Implement internal checks

Have a system of checks and balances in place where multiple people review the calculations before finalizing payments.

Regularly monitor and audit

Perform regular audits and reviews to catch any issues early and ensure that calculations remain accurate.

How Can Enerpize Help You Avoid Commission Error

Enerpize online accounting software could help avoid errors of commission in several ways by providing tools for accuracy, automation, and verification in various processes. Enerpize could automate repetitive tasks like data entry or calculations, reducing the risk of human error. For example, instead of manually entering employee wages or sales tax rates, the software can pre-set values and auto-calculate totals, ensuring that mistakes like entering the wrong numbers don’t occur.

The system can include real-time error detection features that flag discrepancies in data, such as unusually high or low numbers, or mismatched information (like entering the wrong tax rate or sales figures). By setting up predefined, standardized workflows and approval processes, 
Enerpize can ensure that steps are followed correctly and consistently across all users. This prevents users from skipping steps or making incorrect decisions. You can keep detailed logs of all actions taken within the system, so if an error does occur, it can be traced back to the specific action or user that caused it. This can also help pinpoint areas where training or process improvements are needed.