Accounting errors are mistakes made during an accounting entry. Several accounting errors occur in accounting, and they shouldn’t be mistaken for fraud. The most prevalent accounting errors are errors in accounting principles and clerical errors. Due to the prevalence of accounting errors, it is best for business owners to understand accounting errors and how to detect and correct those errors. One effective way of detecting accounting errors is by hiring professional bookkeeping services in Denver to help keep records and track the financial transaction of the business. Bookkeepers’ comprehensive and precise financial transaction records and ledgers make it easier to spot accounting errors.
Types Of Accounting Errors
Balanced accounting information shows the level of expertise and integrity of the business owner or accounting officer. Also, accounting entries are correctly recorded, and budgeting, planning, and tax preparation are much easier and more accurate. Unfortunately, accounting errors are sometimes inevitable when business owners don’t understand what they are and how to correct them. Here are some of the most common accounting errors;
Error Of Omission
An error of omission is quite common, and it occurs when a financial transaction is omitted from the company’s record. It often occurs when business owners forget to record the details of a financial transaction, either a sale or an expenditure of goods and services. Most of the time, these errors are challenging to detect because there’s no transaction record. It’s best for business owners to develop a standard routine of recording every financial transaction.
The major reason these financial transactions are not on record is that the transaction documents get missing.
Error of Reversal
An error of reversal happens when a financial transaction recorded in credit is mistakenly written in debit. This error can be noticed when handling trial balance because it always results in an account imbalance.
Error of Commission
An error of commission occurs when items are recorded in an inappropriate place. In simple terms, the exact amount of the financial transaction was recorded but either placed in the wrong general account or under the wrong sub-accounts. For instance, you could receive a payment from one client and record it under another client’s account. Though the account might be balanced, the information in the record is incorrect.
Error of Transposition
It occurs due to recording an incorrect number of products by interchanging numbers. It could result in understating or overstating the number of items. For instance, instead of recording an expense of $567, you mistakenly record $675. Transposition errors are often costly because they can affect the general account balance.
Compensating error
One compensation error is in two parts; one offsets the occurrence of the other. This error is difficult to detect because it has no net effects. For instance, if an income was mistakenly overstated by $1,000 and the same amount also overstated as an expense, the account may appear balanced, but it contains wrong information.
Error of Duplication
You make a duplicate error when you input the same expense or revenue item more than once. When more than one person has access to the accounting system, and each makes a duplicate entry, an error like this can occur.
Principled Error
A principled mistake occurs when an item is recorded but does not follow Generally Accepted Accounting Principles (GAAP). This usually occurs when an entry is made into the incorrect account. Though the amount of item quantity is correct, it is entered in the incorrect location. A procedural error of principle is a major procedural blunder that can have serious repercussions. The most prevalent example of a principle error is classifying a company expense as a personal expense.
How To Detect and Correct Accounting Errors
Here are some ways to detect accounting errors and work towards correcting them;
Review the Trial Balance
One of the most productive ways to detect and correct accounting errors is by checking for imbalances in the trial balance. Though not all errors affect trial balance, it can still be used to check for several errors. If the sum of debits and credits in the trial balance is not adding up, you should check for accounting errors. Review your account entries to ascertain that there are no errors.
Review Reconciliations
Reconciliations can help in detecting various types of accounting errors. It’s best to conduct reconciliation once a month or yearly, depending on the type of reconciliation. Fixed asset reconciliation is conducted at the end of the year, while bank reconciliation can be conducted monthly.
For bank reconciliation, the first step is to balance the cash account to ensure credits and debits are balanced. Once those accounts are checked and balanced, compare the account to your bank statement. If the bank statement and cash account show different numbers, you should review every data entry to figure out the errors and make the necessary corrections.
Conduct Routine Checks to Identify Accounting Errors
Endeavor to create a routine that allows you to review your accounting records quickly. You should create a system that reduces accounting errors, detects, and corrects them.
How Can You Prevent Accounting Errors?
Though you can detect and correct account errors through reconciliation and trial balance, preventive methods can protect your account from errors. Here are some ways to facilitate better accounting entries.
Educate Your Staff On Data Entry Accuracy
Create time to educate your staff on recording expenses and income correctly. You can use accounting software to train your employees on data entry accuracy. You can set company policy on documentation processes to ensure that accounting entries are done precisely and accurately. Once you’ve sharpened the knowledge of your staff on better data entry techniques, you’ll record fewer accounting errors.
Don’t Overwork Your Workers
When employees have too many tasks to attend to, they might make mistakes while entering account data. You can consider ways to simplify data entry procedures and reduce the workload on your staff.
You can learn more about accounting and various ways to avoid any errors while recording your debits and credits by visiting; https://etacpa.com
Elite Tax & Accounting, LLC
4600 S Syracuse St., Suite #650 Denver Colorado 80237,
720-484-6683