Accounting error definition
/What is an Accounting Error?
An accounting error is a mistake in the accounting records, typically due to a clerical mistake. When spotted, it is typically investigated and corrected by a senior accountant who has experience in error corrections. Accounting errors do not involve fraud, because there is no intent to deceive.
Examples of Accounting Errors
Here are examples of a number of different types of accounting errors:
Error of omission. A company fails to record a $5,000 sale made in cash, resulting in both revenue and cash accounts being understated. This occurs when a transaction is completely omitted from the financial records, often because of oversight or misplacement of records.
Error of commission. An accountant records a $200 payment to Supplier A in Supplier B’s account. The transaction is recorded in the wrong account but is otherwise correct. This can result in incorrect account balances and misleading reports on specific accounts.
Error of principle. An accountant classifies a capital expenditure (e.g., a $10,000 computer) as an expense rather than an asset. This involves using the wrong accounting principle or method. Errors of principle often impact the nature of accounts, such as recording assets as expenses or vice versa.
Error of original entry. An accountant records a $1,000 purchase as $100, leading to understatement of both expenses and liabilities. The amount recorded in the original entry is incorrect, which can lead to understatement or overstatement of accounts.
Entry reversal. A $500 payment to a supplier is debited to Accounts Payable and credited to Cash, rather than debiting Cash and crediting Accounts Payable. This error occurs when a transaction entry is reversed, meaning a debit is recorded as a credit, or vice versa.
Error of duplication. An accountant records the same sales invoice twice, leading to overstated revenue. This happens when a transaction is recorded more than once, inflating the account affected.
Transposition error. An accountant records $4,600 as $6,400 in accounts receivable, resulting in a discrepancy of $1,800. Transposition errors happen when two digits are reversed. This usually causes an imbalance and can be caught if financial statements do not balance.
Compensating errors. An accountant understates revenue by $500 and also understates expenses by $500, leading to no impact on net income but still resulting in inaccurate financial reporting. Compensating errors occur when two or more errors offset each other in the accounting records, making them hard to detect but still affecting individual accounts.
How to Reduce Accounting Errors
Accounting errors can be reduced by training employees properly and installing detective controls. They can also be minimized by standardizing how accounting procedures are conducted, as well as by replacing manual systems with computerized ones. A good way to minimize accounting errors is to conduct a formal review of all errors found as part of the month-end closing process, and adjust procedures to eliminate them in the future.