Types of Error in Accounting
Accounting errors can occur in double entry bookkeeping for a number of reasons. Accounting errors are not the same as fraud, errors happen unintentionally, whereas fraud is a deliberate and intentional attempt to falsify the bookkeeping entries.
An accounting error can cause the trial balance not to balance, which is easier to spot, or the error can be such that the trial balance will still balance due to compensating bookkeeping entries, which is more difficult to identify.
Accounting Errors that Affect the Trial Balance
Errors that affect the trial balance are usually a result of a one sided entry in the accounting records or an incorrect addition.
Irrespective of the reasons why a trial balance may not balance, as a temporary measure the difference in the trial balance is allocated to a suspense account and a suspense account reconciliation is carried out at a later stage.
For example, suppose the trial balance showed total debits of 84,600 but total credits of 83,400 leaving a difference of 1,200 as shown below.
|Trial Balance Totals||84,600||83,400|
To make the trial balance balance a single entry is posted to the accounting ledgers in a suspense account.
When the accounting error is identified a correcting entry is made. Suppose the difference was an addition error on the rent account, then the correcting entry would be as follows:
Errors Which do not Affect the Trial Balance
Accounting errors that do not affect the trial balance fall into one of six categories as follows:
- Error of Principle in Accounting
- Errors of Omission in Accounting
- Error of Commission
- Compensating Error
- Error of Original Entry
- Complete Reversal of Entries
Error of Principle in Accounting
An error of principle in accounting occurs when the bookkeeping entry is made to the wrong type of account. For example, if a 1,000 sale is credited to the sundry expenses account instead of the sales account, the correcting entry would be as follows:
Error of Omission in Accounting
Errors of omission in accounting occur when a bookkeeping entry has been completely omitted from the accounting records.
If the payment 2,000 to a supplier has been omitted then the correcting entry would be as follows:
Error of Commission
An accounting error of commission can occur when an item is entered to the correct type of account but the wrong account. For example is cash received of 3,000 from Customer A is credited to the account of Customer B the correcting entry would be.
|Accounts receivable – Cust. B||3,000|
|Accounts receivable – Cust. A||3,000|
A compensating error occurs when two or more errors cancel each other out. For example, if the fixed assets account is incorrectly totalled and understated by 600, and the rent account is incorrectly totalled and overstated by 600, then the posting to correct the error would be as follows:
Error of Original Entry
An error of original entry occurs when an incorrect amount is posted to the correct account.
A particular example of an error of original entry is a transposition error where the numbers are not entered in the correct order. For example, if cash paid to a supplier of 2,140 was posted as 2,410 then the correcting entry of 270 would be.
A good indicator for a transposition error is that the difference (in this case 270) is divisible by 9.
Complete Reversal of Entries
Complete reversal of entries errors occur when the correct amount is posted to the correct accounts but the debits and credits have been reversed. For example if a cash sale is made for 400 and posted incorrectly as follows:
Then to correct the accounting error the original entry must be reversed and the correct entry made, this can be achieved by doubling the original amounts as follows:
The type of accounting errors that do not affect the trial balance are summarized in the table below.
|Error of Principle in Accounting||Correct amount, wrong type of account|
|Errors of Omission in Accounting||Entry missed from accounting records|
|Error of Commission||Correct amount and type of account but wrong account|
|Compensating Error||Two or more errors balance each other out|
|Error of Original Entry||Correct accounts, wrong amounts|
|Complete Reversal of Entries||Correct amount and account, entries reversed|
Where possible all bookkeeping errors should be identified and corrected, if the accounting errors are immaterial to the accounts then, as a last resort, the balance could be carried in the balance sheet on a suspense account or written off to the income statement as a sundry expense as follows.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.