June 22, 2021

SB-Accounting

Accounting + Finance Blog

Seven Types and Examples of Accounting Errors you should know

Types and Examples of Accounting Errors you should know
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Errors are simply mistakes in accounting. This is as a result of human errors or system failures. When errors occur, it must be located and corrected immediately. This is important. Why? Failure to correct a mistake can affect a business financial statement. In this article, let me explain the types of mistakes that don’t affect trial balance.

Type of Accounting Errors

Below are seven types of accounting errors you should know.

Accounting Error of Omission

This error occurs when a data entry officer does not enter a particular transaction in the books of account. The mistake may begin from the source document. That is, the business event was not recorded at all. For example, a customer buys goods on credit for NGN 507,000. But it was not recorded in the sales invoice.

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Note that the sales invoice is the first point of recording sales events. Failing to record a sales transaction here will affect the primary books of account. Therefore, resulting in an error of omission. To correct the error above, the officer in charge will post the normal double entry for the transaction. That is, debit the debtor a/c and credit sales a/c.

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Accounting Error of Principle

This mistake is the result of the wrong class of account. What is meant by wrong class? There are different classes of account. Generally, there are income, expenses, assets and liabilities accounts. A data entry staff is supposed to post an entry to an expense account but record it to an asset account. This is an error of principle. It could be an entry for a liability a/c but posted wrongly to an income a/c.

For example, payment for repairs of a motor van for NGN 50,000. Here, the data entry officer mistakenly posted it to motor van a/c. But it should be in motor van expenses a/c. To correct this, the amount will be removed from motor van a/c to motor van expenses a/c.

Accounting Error of Commission

This mistake is the recording of a business event to the wrong personal accounts. By personal accounts, we mean names of persons and organization. Names of organizations include banks and businesses. For example, goods were sold on credit to Abi & Sons Limited but was posted to Ami & Sons Limited. This error is corrected by simply removing the amount from the wrong a/c (Ami & Sons) to the right one.

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Accounting Error of Original Entry

This is the posting of the wrong amount. The accounts involved here have the wrong amount. To illustrate, the total of discount allowed were wrongly posted in the books as NGN 279,000 instead of NGN 209,000. The mistake is an overstatement of NGN 70,000. This amount need to be removed from the books of account involved to correct the error.

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Error of Transposition

This is similar to the original entry error. However, it is about repositioning the amount in the wrong way. For example, a purchases day book total was wrongly posted to purchases account as NGN 647,000 instead of NGN 674,000. This is an understatement. To correct the mistake, the difference of NGN 27,000 will be added in books to correct it.

Compensating Error

Here, the same amount or an aggregate of similar amounts was found in error in the debit and credit sides of several accounts. This kind of error mostly occurs when a fraud is committed. It is done to cover up embezzlement. But, this may not always be true. For example, Bank account was overstated with NGN 450,000. So is the sales account and return outwards account by NGN 300,000 and NGN 150,000 respectively.

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Complete Reversal of Entry

This type of accounting error occurs where the double entry rule is wrongly applied. A data entry employee may have posted a transaction, on the wrong side. Say an account to be debited was credited and vice versa. An example is payment for commission. The officer entered it by debiting the cash account and then credited commission paid a/c. This error is corrected by reversing the entry and multiplying the amount by 2.

Conclusion

Finally, accounting errors include all the aforementioned. These errors may affect trial balance. If they occured in one side. That is, either the debit or credit side. If the error occurs on both sides, then it won’t affect trial balance. In any case, errors may likely affect a profit statement. Therefore, when the mistake is corrected, it is important to correct the profit by preparing an adjusted profit or loss statement.

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