What is Accounting Errors? Types, How to Rectify Accounting Errors

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What is Accounting Errors?

An accounting error is a non-fraudulent or non-intentional discrepancy in financial documentation.

Accounting errors are of various types, mostly they are unintentional mistakes that happen due to the monotonous work of recording journal entries which are huge in number or maybe less clarity about the transaction.

Accounting errors which are negligible will not affect financial statements; however, it might cause major distortions in overall figures.

Therefore, you cannot take chances in eliminating these errors. Identifying and rectifying these errors takes a lot of time and resources. However, it may become easier if you know where to spot and to correct them.

Types of Accounting Errors

There are some errors that are not detected by the trial balance and some errors that can be detected by the trial balance. There are two types of accounting errors. One type of error are that cannot be detected in the trial balance and the other type of errors are that can be detected in the trial balance.

Based on these two types, errors are categorised as follows:

Errors That Cannot Be Detected From the Trial Balance

Errors of Complete Omission

A transaction that has occurred but has not been recorded in the journal, so neither the debit nor credit entry is done, such errors may not get detected in the trial balance. As the debit and credit entry will tally without a transaction being entered.

For example, a credit purchase of stationary not entered in the books will not have a debit or credit effect, and hence cannot be detected of being omitted in the trial balance.

Errors of Commission

These happen when an account is debited instead of credited and vice versa. Therefore, the trial balance will not detect this kind of error.

For example, the actual credit sales were for ₹ 10,000 but recorded as ₹ 1,000 in both sales and cash accounts, therefore, it cannot be detected in the trial balance.

Compensating Errors

These errors happen where there is an equal amount of error both on the debit and credit side. Therefore, one error has compensated the other, so it also cannot be detected as there will be no disagreement in the balances of the trial balance.

For example, if an amount of ₹ 500 is less debited in the purchase account and at the same time an amount of ₹ 500 is omitted from the sales account, these two errors will compensate each other and will have no effect in the trial balance.

Errors of Principle

On violation of an accounting principle while recording a transaction, leads to an error in the entry which is called the error of principle. When the accounting entry for the transaction is done with a wrong understanding of the accounting principle and does not meet the generally accepted accounting principles (GAAP), then an input error occurs, as the amount is correct but the account is wrong.

For example, drawings of goods by a partner are recorded as sales. This kind of error is not easy to detect unless journal entries are checked thoroughly.

Another example is when an asset is purchased but is recorded in the purchases account, then this kind of error is an error of principle. But this will not be detected in the trial balance as it will have an equal and corresponding credit entry.

Errors That Can Be Detected in a Trial Balance

Subsidiary Entries

If an entry is overcast or under cast, i.e., the amount is not correctly recorded, then this kind of mistake is called subsidiary entries and they are mostly detected during the process of preparing the bank reconciliation statements.

For example, if the sales journal correct total is ₹ 4,200 but due to an error in totalling it has been totalled to ₹ 3,900, and this amount is posted to the credit side of Sales A/c which puts the Sales A/c short by ₹ 300 and the trial balance will not tally, there will be a difference of ₹ 300. Similarly, if the amount is not posted at all in the Sales ledger then again there will be a shortage of ₹ 4,200 on the credit side.

Error of Omission

Error of omission as the name suggests, where a transaction is omitted to be entered in the books of accounts. You may forget to enter an invoice that you have paid for some service.

For example, if the purchase of a printer is omitted but the amount is paid to the supplier, then the cash will show a less balance without a corresponding purchase entry and thus the trial balance will not tally. For every debit entry, there has to be an equal corresponding entry. A bank reconciliation statement would help to detect such errors.

Transposition Errors

When two digits of an amount are reversed or transposed then such error is called a transposition error. It looks very simple; however, it is very difficult to detect and the trial balance does not agree.

For example, ₹ 3,768 is recorded as ₹ 7,683. The Old Dominion University suggests that such kind of errors could be detected by dividing the difference of the totals by nine and if it gets complete divisible then there is a transposition error and you need to check all the amounts if they are correctly recorded.

Roundoff Error

Where to round up or round down this logic needs to be set properly with the software or with whom is recording the transaction.

For example, if the logic for recording every figure with decimals up to .50 is rounding down and over .50 is rounding up, recording at one place with reverse logic and other place with the above logic will cause an error that will bring a difference in the trial balance.

Errors of Reversal

This is a type of errors of principle, where instead of debiting an account it is credited or vice versa, then these kinds of errors are called errors of reversal.

For example, an in voice of ₹500 should have been posted in accounts receivable but is posted in accounts payable. These kinds of errors can be detected by dividing the difference in the debit and credit balance by two and the answer derived should be checked in the trial balance. You may find it either on the debit side or credit side and then accordingly make corrections.

Errors of Commission

These kinds of errors happen when the account entered is correct, amount is correct but the action of addition/subtraction/ multiplication or division is incorrect.

For example, the calculation of trade discount is done correctly but instead of subtracting it is added over the amount payable which gives a wrong effect to the balance of the account.

Wrong Casting of Amounts

When the total balance amount arrived at in any ledger account but is posted wrongly in the trial balance. The amount posted is less than or more than the correct amount, there is overcasting or under casting of that account.

For example, the total of the purchase book has been casted ₹12,000 more. When this total will be posted to the debit side of the purchase account, it will also show an excess debit of ₹ 1,000 thus giving a difference in the trial balance.

Posting to Wrong Side of an Account

Instead of posting in the debit side, the entry is done on the credit side or vice versa, then the trial balance will not tally.

For example, Jagtap purchases goods for ₹2,000 purchased from Dhenu. He enters the transaction on the debit side of Dhenu’s account instead of credit, thus the credit side will have ₹4,000 and nothing on the debit side, giving a difference of ₹4,000 in the trial balance.

Posting an Amount Twice in an Account

For example, ₹ 500 received is entered in the cash book twice, but only once in the debtors account, then the trial balance will not tally.

Errors of Totalling and Balancing of Accounts in the Ledger

There is always an element of human error and it mostly happens while totalling or balancing, but with computerised accounting, these kinds of errors are eliminated to a great extent. If there is a totalling error and these balances are posted in the trial balance, then it would disagree

How to Rectify Accounting Errors

The main objective of preparing a trial balance is to detect arithmetic and accounting errors and rectify them so that the financial statements prepared on the basis of the trial balance are accurate and reliable for taking business decisions. Therefore, errors must be located and rectified. However, this task is not easy.

There are some steps that have been followed systematically to locate errors:

  • Do a total check again. If the trial balance is not prepared in an accounting software but in an excel spread sheet, check that the row selected for the total is correct with the correct formula. Check the total on the calculator as well.

  • Verify that all the ledger account balances transferred to the trial balance are correctly entered in figures and to the correct side, i.e., the debit balance account to the debit column and the credit balance account to the credit column.

  • Check all the total of the subsidiary books using a calculator if prepared in an excel spreadsheet and see whether correct figures are posted in the ledger accounts.

  • Double check that all journal entries have been correctly posted to different ledger accounts

In case the trial balance still does not agree, i.e., the debit total is not equal to the credit total, then there are still some errors in the accounting process that needs to be rectified.

  • Add the credit and debit columns again to check the totals
  • If it still has a difference, then subtract the smaller total from the bigger and find the missing amount in the smaller side column. If you find it, your error will be rectified and the trial balance will tally.

  • There are other standard techniques too that are used to track down errors in a trial balance. Take the difference of the debit and credit side columns and divide it with 2. If it divides it equally, then find an account which shows that amount in the higher side total of the trial balance. This will show you to investigate the account where you may find the error.

  • Another such technique is where 9 is used to divide the difference to detect transposition errors.

    For example if an accountant enters 74 instead of 47, there would be a difference of 27. This will be evenly divisible by 9 to give 3. So when you the difference is divisible by 9 evenly, that means there is a transposition error and the accountant should check all the amounts for these kind of error.

Correcting Accounting Errors

Journal entries are done to correct the previous wrong entries to give the correct effect to the accounts which will fix the error. Correcting entries are part of the accrual accounting system and they are mostly done on the double-entry bookkeeping principle.

Error of Omission

For example, salaries payable for ₹10,000 was not recorded. This is an error of omission. To correct this kind of error, a journal entry is done for ₹10,000 in the salary expense (debit) account and in the salary payable (credit) account.

Previous Period Errors

There are cases where in the previous year the transaction was wrongly entered but not corrected not detected but is detected in this accounting period, there is an effect of such errors in the current books as well as they get carried down. To correct this error, you need to do correcting journal entries.

For example, an error was committed in the books of 2017 in salaries payable of ₹10,000 not recorded, to make the correction now in the current year add ₹10,000 to the salary expense account debit and salary payable credit in the closing balance of 2017 and correct the opening and closing balance to the current period.

Wrong Casting of Amounts

You can reverse the erroneous entry and make a fresh correcting entry. Or make a correcting entry with the difference amount

For example, entry of ₹5,600 was recorded as ₹5,300. You can make an entry of the difference amount of ₹300 to balance the effect.

Wrong Accounts Posted

You can reverse the entry by crediting what was debited and debiting what was credited. And make a correct entry to get the accounts rectified. Example: Wrong Entry

Cash A/cDr. 5,000
To Machinery A/c
(Repairs to machinery paid by cheque)

Reverse Entry

Machinery A/cDr. 5,000
To Cash A/c
(Being entry erroneous entry no reversed)

Correcting Entry

Repairs & MaintenanceDr. 5,000
To Bank A/c
(being entry corrected repairs to machinery paid by cheque)

Suspense Account

If the trial balance tallies after all the procedures applied above, we, are good to go ahead and start preparing final accounts. However, it happens most of the time in huge transactions and corporates that there is a difference which is negligible and cannot be detected after following all the mentioned techniques.

Therefore, it is wise to move forward in making final accounts than to invest more time in detecting the error and check thousands and thousands of entries and amounts.

In such a situation, the difference is written in column with smaller total amount as a suspense account. Later on, whatever errors are detected are then rectified in the suspense account. And if the errors are all detected then the suspense account gets nullified and does not appear in the trial balance or in the final accounts.

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