Accounting Errors

 Accounting Errors

Following types of accounting error can occur in a accounting system. It is important to remember that errors described below are some of the common types accounting errors only. There may be sub classification of these accounting errors.

List of Common Accounting Errors

1.    Error of Transposition.

2.    Omission Error.

3.    Error of Commission.

4.    Error of principle.

5.    Ledger posting Error.

6.    Ledger Totaling Errors.

7.    Trial balance extracting error.

 Above mentioned accounting errors has described below;

1.   Error of Transposition

In this type of error digit are read and recorded in wrong order. These errors results due to over or under recording of expenses, incomes, assets, equity or liabilities.

The under recording is simply corrected by repeating the same entry with under recorded amount. The over recorded amount is corrected by passing reverse entry. The under or over recording in one account is corrected with help of suspense account.

Transposition error may be in one account or both account, for example a purchase of 1702 may be recorded 1720 in following ways

Wrong Entry

Date	Particulars	Dr	Cr
	Purchases  A/c	1720
	Cash A/c		1720

Correct Entry

Date	Particulars	Dr	Cr
	Purchases  A/c	1,702
	Cash A/c		1,702

Correction Entry

Date	Particulars	Dr	Cr
	Cash  A/c	18
	Purchase A/c		18

2.   Error of Omission:

An accountant has forgotten to record the entry, because entry is not recorded at all, therefore it will affect two accounts.

This error is corrected by simply recording the transaction in General Journal. Accountant may be omitted to record transaction in one account only. In such case error is corrected with the help of suspense account.

3.   Error of Commission:

When entry is recorded in wrong account, then it is called error of commission. The entry is recorded in wrong account or accounts with correct amount. These types of error are corrected by recording an appropriate adjusting entry.

These errors include following

a)    Discount allowed is recorded in discount received.

b)   Water bill is recorded in Electricity bill.

c)    Repair of office is recorded in repair of vehicles

4.   Error of Principle:

When accountant wrongly classify the (select wrong type or nature of account) i.e. revenue expenditure is classified as capital expenditure. This type of error is an extension of error of commission and corrected by recording an adjusted entry.

a)    Repair is recorded as purchase of plant & machinery.

b)   Expense item is recorded as income.

5.   Posting Error:

An entry was correctly recorded in the journal, but wrongly posted in General ledger. Such posting may be wrong in one account or both account of general ledger. The rule of single and double effect would apply for correction of posting errors. The correction process has been explained in my other article.

6.   Ledger Totaling Error:

Ledger account may be wrongly total and therefore wrong balance transferred to the trial balance. Amount is correct or adjusted with the help of suspense account.

7.   Trial balance extraction error:

General ledger figures are not correctly transferred to the trial balance correctly or trial balance is not correctly extracted from the ledger balance.

Methods of Correction of Accounting Errors

1.   Single Effect Errors:

Single effect errors are those errors which affect the single side of an account. It is important to note that single effect error are reflected in trial balance (Trial balance would not be equal). These Types of error are

a)    Amount recorded twice on debit side.

b)   Amount recorded twice on credit side.

c)    Debit side is over recorded than credit side and vice versa.

d)   Omission to post amount in one account only.

e)    Omission to record transaction in one account.

f)     etc

These errors are corrected with the help of adjusting entry using a suspense account, because there is only single effect (one account is affected), therefore to complete the dual aspect of journal entry suspense account is used.

2.   Double Effect Errors:

There are number of an error which has dual effect (two side effect debit & credit side).  It means that something is wrong, but this wrong entry has effected both side of trial balance i.e. debit & credit side.

a)    Omission of recording the whole transaction.

b)   Omission to post the whole transaction.

c)    Entry in wrong accounts with correct amount.

d)   Asset is classified as expense.

e)    Liability is classified as income.

These errors are corrected by recording the adjusting entries. The process of identifying the correct adjust entry has been explained below.

Process of Accounting Error Correction

1.   Identifying Errors

First thing is to identify the errors. It is not an easy task to identify the errors, especially when the trial balance is equal. However, the following steps may be helpful for identifying the errors.

a)    Trial balance equality review for identifying single effect errors.

b)   Trial balance review for unusual account activity due to error.

c)    General Ledger re totaling.

2.    Correct Treatment

Once the error has been identified, the next step is to establish the right or correct thing (what should have been done). There would be no problem to identify the correct entry for an experienced and qualified accountant.

3.   Comparison of Right & Wrong

Error and correction are compared to find out the right adjusting entry. The following format may be helpful for such comparison.

	Wrong Entry		Right Entry			Adjusted Entry
	Dr	Cr	Dr	Cr	Dr		Cr
Purchase	100		1000		900
Cash		100		1000			900