Accounting Errors and Corrections

Types of Error in Accounting

Accounting errors can occur in mdct.ru 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.

As a temporary measure, to balance the trial balance. 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.

Suspense Accounts – Trial Balance Difference
Account Debit Credit
Trial Balance Totals 84,600 83,400
Difference 1,200
Total 84,600 84,600

To make the trial balance balance a single entry is posted to the accounting ledgers in a suspense account.

Suspense Account Posting
Account Debit Credit
Suspense account 1,200

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:

Suspense Account – Accounting error correction
Account Debit Credit
Suspense account 1,200
Rent 1,200

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:

  1. Error of Principle in Accounting
  2. Errors of Omission in Accounting
  3. Error of Commission
  4. Compensating Error
  5. Error of Original Entry
  6. 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:

Accounting Errors – Error of Principle in Accounting Example
Account Debit Credit
Sundry expenses 1,000
Sales 1,000

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:

Accounting Errors – Errors of Omission in Accounting Example
Account Debit Credit
Accounts payable 2,000
Cash 2,000

Error of Commission

An accounting error of commission occurs 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.

Accounting Errors – Error of Commission
Account Debit Credit
Accounts receivable – Cust. B 3,000
Accounts receivable – Cust. A 3,000

Compensating Error

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:

Accounting Errors – Compensating Error
Account Debit Credit
Fixed assets 600
Rent 600

Error of Original Entry

An error of original entry occurs when an incorrect amount is posted to the correct accounts.

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.

Accounting Errors – Error of Original Entry
Account Debit Credit
Cash 270
Accounts payable 270

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:

Accounting Errors – Incorrect posting
Account Debit Credit
Sales 400
Cash 400

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:

Accounting Errors – Complete Reversal of Entries
Account Debit Credit
Sales 800
Cash 800

The type of accounting errors that do not affect the trial balance are summarized in the table below.

Summary of Accounting Error Types
Accounting Errors Description
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 accounting 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.

Accounting Errors and Corrections June 6th, 2017Team

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