As much as having a clear and clean transaction is vital for a thriving business is also important to maintain the integrity of the transaction data entered into your accounting system. Lapses in accounting may be intentional or non-intentional but when audited could lead to severe consequences.
In order to catch these mistakes, it is important to know what these errors are. Here’s a quick roundup of such errors.
- Error of commission
When a transaction is wrongly recorded in accounting books it’s then called error of commission. This error in recording can be occur when an amount added is subtracted, when a value is entered partially or incorrectly. Classification of such errors are as follows:
(a) Errors of subsidiary books:
These are three types:
- Recording wrong amount in a subsidiary book
A purchase of Rs.430 may be entered as Rs.340
- Entering the transaction in the wrong book
Recording a purchase transaction in sales book
(iii) Wrong casting: A mistake in relation to totaling is called ‘error in casting’.
(b) Errors relating to ledger:
They are of 2 types:
- Error of posting: Recording wrong amount on the right side of an account.
- Errors in balancing: Errors in balancing that result in excess or short balance of the account.
(a) Errors that affect the trial balance agreement
(b) Errors that do not affect the trial balance agreement.
2. Data entry errors
These are mistakes made while entering the items in the accounting system.
Types of data entry errors
a) Error of duplication
An error where same entry is passed twice either due to human or system error.
- Error of principle:
A transaction that does not meet generally accepted accounting principles (GAAP) where it is recorded in the incorrect account.
- Transposition errors
When two or more digits are reversed individually or as part of a larger sequence.
“2345” instead of “2435.”
- Rounding Error
When an entry is modified an integer or one with fewer decimals.
$24.965 instead of 24.9646
- Reversal of Entries
This error happens when an entry is debited instead of being credited, or vice versa.
An invoice of $200 sent to a client is recorded as accounts payable instead of accounts receivable.
- Compensating Error
Compensating errors compensate mutually the effects of one another. Commodity sold for $2,000 but recorded on the client’s account as $200.
- Error of Original Entry
An error of original entry occurs when a wrong figure is posted to the right account in the book of prime entry.
Consequences of these error may put a dent in your business budget. Any miscalculation or error may result in paying more tax as you may have lost sight of a deductible expense. Also, an error detected later in accounting cycle may attract late fees and interest as it is past the due date. A failure to catch these errors at the right time means you are making way for employee fraud or embezzlement.
For a sound account reporting correct data entry of financial information is the first line of defense. This means including an item corresponding to a transaction in the correct account, applying the appropriate description and entering the right amount. Often times this is overlooked and will require identifying and correction the error in the backend which is a laborious task.
An inaccurate financial statement is always a setback for businesses. If you are haggling with irreconcilable inconsistencies in your finances CNB Consulting can help you get it back on track. We have a trained team that adopts the best accounting practices and standards. We use the newest version of cloud-based accounting software and can implement internal controls for the correct flow of numbers. We also conduct a review of accounts at regular intervals to catch any discrepancies. Contact us today and say goodbye to your accounting worries.