Accounting errors are the bane of a bookkeeper’s and business leader’s existence, and anyone can go mad when any of these types show up on the ledger.
However, these are rather common errors, a result of the very tedious and repetitive nature of bookkeeping. Bookkeeping, which is the process of rigorously recording of a business’s daily transactions, is prone to human error. And this is especially true when your bookkeepers are not outsourced accounting specialists.
But what exactly are the different types of accounting errors your business’s financial records should avoid? And how do you keep them at bay?
We’ll answer these questions — and more — in this article. But before we look into the different kinds of accounting errors, let’s briefly discuss what accounting is first.
What is Accounting?
Many tend to confuse accounting with finance. After all, both fields deal with money. But there are key differences between the two, and knowing what separates one from the other will help business leaders like you make better decisions for your company.
You can head over to our previous blog post to read all about the differences between finance and accounting. But for this article, accounting is all we need to tackle.
In a corporate setting, accounting’s primary concern is a company’s financial data, which originates from its daily transactions.
Some of the questions accounting specialists and bookkeepers regularly ask are:
- What transactions did the company make within a specific period?
- How much money are we expecting to flow into or out of the company?
- Given this data, how do we assess the company’s financial health?
Different types of accountants handle different areas of accounting. With regard to accounting errors, however, it’s the bookkeeping specialist you’ll need to cooperate with to prevent them from happening.
Types of Accounting Errors
So, what is an accounting error?
According to Investopedia, an accounting error is an unintentional error made in accounting entries or bookkeeping. It’s not the same as fraudulent reporting, which is the intentional misrepresentation of financial records.
Bookkeeping takes up a small part of the full range of accounting activities, dealing mainly with recording and organizing a business’s daily transactions.
That might sound trivial to some, but it’s the very thing that will determine the accuracy of the rest of your accounting activities. So it’s safe to say bookkeeping is not only necessary but also crucial to your business.
And because of this, it’s equally important for you to be aware of the errors that could get in the way of your company’s strong financial health.
Without further ado, these are the different types of accounting errors you need to know:
Some of the Most Common Types of Accounting Errors
Errors of Reversed Entries: It’s no secret that record-keeping can be tricky. And one of its confusing tasks is knowing whether to post an expense under credit or debit. In reversed entries, entries are either credited or debited inaccurately. So it’s vital for bookkeepers to have a keen eye and understanding of where each company purchase should fall under.
Errors of Principle: Perhaps the most complex among the types of accounting errors is the error of principle as it requires an accounting specialist to have an understanding of the GAAP.
An accounting specialist must follow this system to keep financial records organized. Failing to do so amounts to an error of principle. An example of this is designating a type of transaction under the wrong category (e.g., payroll as a fixed-asset purchase).
Errors of Commission: An error of commission is often referred to as an error resulting in negligence. It generally happens when an accounting clerk debits or credits the right amount to the wrong account.
Errors of Original Entry: This error happens when records reflect the wrong amount or figure of a transaction. For example, a credit of $806,000 was charged to XYZ Inc.’s account, but the amount posted in the ledger is $860,000. A common example of this type of accounting error is the error of transposition, which cannot be determined in trial balance.
Errors of Duplication: As the name implies, duplication errors in bookkeeping involve posting a transaction more than once. Duplication errors occur when a bookkeeper credited or debited a single entry twice, according to Investopedia.
Errors of Omission: And lastly, an error of omission is committed when a bookkeeper fails to record a transaction.
An Error within an Error
There’s an additional type of accounting error where the correction itself is an error. We call this the compensating error, initially meant to offset any of the previous types of accounting errors.
Normally, when an accounting specialist spots any of the errors, they make additional changes in the ledger to indicate a mistake has been made.
So if that correction still fails to account for the correct transaction, amount, or accounting entry, the resulting change is a compensating error.
The Consequences of Accounting Errors
Financial reporting is the end-product of most, if not all, accounting activities. An article in a Texas-based daily encapsulates the dangers pretty well.
It reads, “If your [financial] reporting is inaccurate, that can lead to legal trouble, stock prices dropping and bad company decisions.”
In more concrete terms, poor bookkeeping efforts leading to accounting errors may result in:
- Poor decision-making as a result of inaccurate financial data
- Undervaluation of your company
- Incurrence of penalties
- Wasted time and resources
- Payment in arrears
How to Prevent these Types of Accounting Errors
If you’re committed to successfully running your business, preventing these accounting errors should be at the top of your list. So we asked one of our expert accountants for advice. Here are five ways you can prevent accounting errors from tainting your records.
- Regularly visit your chart of accounts by keeping your bookkeeping updated. Aside from avoiding backlogs, regular processing can also help you catch errors ahead of time. Plus, it serves as an exercise in self-auditing your work way before the actual auditors come in.
- Organize and track invoices and receipts, both physical and digital. Use a naming convention that will help you sort the items faster. It’s best practice to include dates or periods in the naming convention.
- Automate parts of the process. You can seek professional help to accomplish this.
- Check and revisit your work in case of transposition, transplacement, omission, or counterbalancing and noncounterbalancing errors. Accountants deal with the bulk of transactions on a daily basis, so it pays to be rigorous with the data you collect.
- Outsource accounting specialists. One surefire way to avoid any of these types of accounting errors is to have a professional team doing the work for you! Outsourcing finance and accounting specialists will not only reduce your company expenditures but also get you some of the best professionals in the business.
The common types of accounting errors are those of:
- Reversed Entries
- Original Entry
- Compensating Errors
To avoid these errors, our expert accountant advises the following:
- Regularly visit your chart of accounts by keeping your bookkeeping updated.
- Organize and track invoices and receipts, both physical and digital.
- Automate parts of the process.
- Check and revisit your work in case of transposition, transplacement, omission, or counterbalancing and noncounterbalancing errors.
- Outsource accounting specialists.
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