Types of Accounting Errors and How to Prevent Them
You will make accounting errors from time to time, so knowing how to detect these problems is an important skill to develop regardless of what accounting software application you use in your small business. You will be able to detect many errors by reviewing your company’s trial balance.
However, you will find that not all accounting errors affect the trial balance. For this reason, it is important to learn about these types of accounting errors so you can find and correct them. You should note that these types of errors are the most difficult to identify and resolve.
An error of omission occurs when a transaction is completely omitted from the books of your company. You may forget to enter an expense transaction or enter the sale of a product or service. These transactions are difficult to detect. Therefore, you need to make sure you have a solid routine for entering these transactions timely.
The most common reason that these transactions are not entered is that the documentation (such as a vendor’s invoice) gets lost. You are less likely to lose or misplace these supporting documents if you enter them timely in your accounting software system as soon as possible.
An error of reversal occurs when a transaction that should have been posted as a debit is posted as credit. For example, you may enter an invoice as a payment or refund. You will not notice this error in your trial balance because the trial balance will still be in balance.
An error of principle occurs when you or your bookkeeper wrongly applies an accounting principle. You may expense assets that should be recorded as assets. Assets and expenses are both recorded in the books as debits, so this is a technical error.
An error of commission occurs you enter a transaction to the correct class but the wrong subsidiary ledger. For example, you will commit this error if you apply a payment to the wrong invoice. Your trial balance will show the correct amount owed by a customer, but your individual customer’s subsidiary ledgers will be incorrect.
An error of subsidiary entry occurs when an error is made when entering a transaction. For example, if you loan a customer $5,000 but enter only $500 as a loan and $500 withdrawal from your cash account, then you will find that this error is carried to your trial balance. Your trial balance will be correct.
The most common method for detecting these errors is to conduct accounting reconciliations. Continuing with the previous example, you would detect this error when you performed your bank reconciliations. You would find that you would be short $4,500 of cash in your bank account, and then would be able to correct the error.
You will have to develop good internal controls and processes to detect errors. For example, you will want to make sure that all your forms are consistent so that employees will get into a routine when entering information into your accounting software. You will also want to ensure that you have enough staff to be able to handle the workload. Understaffing will lead to employee fatigue, which will result in worker fatigue, rushed work, and more accounting errors.
While you will want to develop methods for preventing errors whenever possible, the errors listed above are going to happen from time to time. You cannot prevent all errors from happening. You should conduct various reconciliations at month and year-end to detect many errors so that they can be corrected.
Bank reconciliations, for example, should be performed monthly. Fixed assets may be reconciled only annually so you can ensure that you have booked the correct amount of depreciation expense.
You will find that if you look for ways to prevent errors and have a routine of performing reviews and reconciliations of your accounting records that your business will run smoothly and you will reduce the number of your accounting errors.