Humans are prone to errors. Therefore, when posting to a Ledger, Journal books or an accounting software care must be taken to avoid errors. However, if errors occur necessary steps are performed to correct the errors. In this article, the focus is what are errors in accounting.
What are accounting errors?
These are errors that occur while posting in the books of accounts, accounting software or when preparing and presenting a financial report.
Errors in accounting are different from fraud. While errors occur by mistake, fraud is done willfully. Also, a recurring error may be regarded as fraud.
It occurs during posting. Generally, errors occur when posting in the books of account. It may occur in various ways as discussed in errors that do not affect trial balance. Failure to compare the names in the source document and that in the books of account may result in an error. Also, if the bookkeeper failed to check the correct amount before posting to the books of account, it might lead to a mistake in accounting.
It may occur in accounting software. Although, the use of technology reduces mistakes. However, because of the human factor involved error might occur when staff posted to the accounting software. The errors are similar to those errors that occur with the use of Ledger and Journal books.
In either case, when such errors in accounting occur, it may be detected in the trial balance in the accounting software or that prepared periodically by the accountant (when there is no accounting software).
In preparing and presenting financial statements errors might surface and may cause the statement of financial position not to have the same balance for net assets and equity (shareholders fund). The problem here is the nature of the mistake. That is if the error is material or immaterial.
If the error in accounting is material, it means that it will affect the decision of users of such financial reports negatively. However, an immaterial error will not affect users’ decisions. It is difficult to know if an error is material or not as it is not possible to calculate materiality. This is because materiality is subjective. It is only decided by the entity or the user of such information.
Types of Errors in accounting
There are generally two types of accounting errors.
Errors that do not affect the trial balance,
And Errors that affect trial balance.
If an accounting error does not affect trial balance, it means that the mistake must have an impact on both debit and credit sides of one or more accounts in the books of account of the business.
However, if an error affect trial balance, the error has occurred in either the debit or the credit side (and not both sides) of the accounts in the books
We will discuss these errors in detail in another article.
To wrap it up, errors in accounting occur when humans who post transactions into the books of accounts or accounting software make mistakes. It may as well occur in a financial report. When it affects financial statements such mistakes might be material. And if so, the decision of its users will be jeopardized.