Types of accounting errors based on their nature
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Accounting Errors - Types of Errors in Accounting
- Category :Business Management
Mistakes or errors are common in the process of accounting. There are different types of accounting errors. This articles discusses the types of accounting errors.
The trial balance is a list of debit and credit balances in the ledger accounts of a business at a given date. Trial balance acts as the first step in the preparation of financial statements. The purpose of trial balance in accounting is to ensure that the financial entries in a company’s bookkeeping system are mathematically correct. Thus, it leads to check the arithmetical accuracy or correctness of recording in journal, posting to ledger and balancing of ledger accounts. If trial balance agrees, it’s assumed that recording, posting and balancing has been done correctly or accurately. If it doesn’t, it requires efforts to locate errors in accounting records.
However, agreement of trial balance, that is, the value of all debit value balances equal the total of all the credit value balances, may not be a conclusive evidence that an accuracy in accounting records has been made. This would lead us to know and understand the accounting errors and the types of errors in accounting. The procedure that is used to set right accounting errors is called as rectification of errors. Let’s now discuss the types of accounting errors in a little bit detail.
Errors of Omission – Errors of omission refers to omission of transactions at the time when transactions are recorded in subsidiary books or posting to ledger. It must be noted that if a transaction is not recorded in the book of original entry or journal at all, it does not affect the trial balance and so the agreement of trail balance will remain same, because both aspects, that is, debit balance and credit balance do not show any change. This is the example of complete omission. However, there is another type of omission error which is referred to as partial omission. Such error occurs if a financial transaction is recorded only partially. For example: if certain amount of money being received by Samuel as personal loan is credited to cash account correctly, but it is not posted to Samuel's personal account.
Errors of Commission – In addition to omitting the transactions at the time of recording or posting, business transactions are sometimes recorded and posted wrongly. For example: recording of incorrect amounts or posting on wrong side of accounts. If purchase of goods is for $ 5,000.it’s entered in journal or ledger as $ 500.
Compensating Errors – It refers to two or more errors that reciprocally nullify the effects of one another. When two or more one side errors take place in such a way that there effect is nullified, they are called as compensating errors. For example: If $500 credit sales to John to be posted to debit side of John’s account is omitted and credit purchase from Samuel $ 500 is not posted to the credit side of Samuel Account, it will nullify the effect. Since the first error reduces debit side by the aforementioned amount and so does the second one, the errors in the related accounts, John’s and Samuel’s are compensated by each other. It thus doesn’t affect agreement of trial balance.
Errors of duplication – These errors occur due to double recording or double posting of transactions. For example: goods being sold to Samuel have been recorded wrongly twice or more.
Errors of Principle – Besides the above stated errors there are errors that occur when the accounting principles are violated by accountants in the process of accounting. Since these errors have a lot to do with accounting principles, such as, making distinction between capital and revenue items, capital expenditure or revenue receipts or proper valuation of assets etc., it is important to have a good grasp of accounting principles and concepts. However, these errors include debiting purchase of furniture to office expense account or crediting sale of furniture to sales account etc.
Though suspense account and error correction go conjointly for accountants to breathe a sigh of relief, especially, during the times when the pressure is put on them for closing of accounts, and a suspense account is a temporary resting place where by the entries will end up somewhere at a later stage, it is far better to maintain the accuracy in the process of accounting so as to avoid the aforementioned errors and complete the accounting process effectively and efficiently.
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