Accounting Errors

In this post, we will learn about Accounting Errors.

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Accounting Errors

Accounting errors refer to mistakes made in the bookkeeping process, which can lead to inaccurate financial statements. There are different types of accounting errors, such as errors of omission, errors of commission, errors of principle, and errors of original entry. These errors can occur due to various reasons, such as human error, technical errors, or incorrect data entry. If not detected and corrected in a timely manner, accounting errors can result in misreporting of financial information, which can affect the decision-making process of stakeholders such as investors, creditors, and management. It is, therefore, important to identify and correct accounting errors as soon as possible to ensure accurate and reliable financial reporting.

Types of Accounting Errors

There are two types of Accounting Errors:

1. One Sided Error
2. Two Sided Error

1. One Sided Error

One-sided errors are those errors which affect the agreement of the trial balance. These errors affect only one account and only one side i.e. debit or the credit side of the account. Errors of partial omission, recording transactions with wrong casting and wrong posting are examples of one-sided errors.

Moreover, wrong casting in the ‘Day Books’ leads to such kind of error. These kinds of errors are easy to detect as it does not allow the Trial Balance to match.

For Example, Cash paid to Ram Rs.1500, debited to Ram Account as Rs. 500

2. Two Sided Error

Two-sided errors are those errors which do not affect the agreement of the trial balance. These errors occur in two or more accounts. Such errors are rectified by passing journal entries. Errors of complete omission, errors of principle and compensatory errors are examples of two sided-errors. For example, credit purchases from Sohan of Rs. 15,000 were not recorded in the purchases book. This is an error of complete omission because purchases account is not debited and Sohan’s account is not credited.

Types of Error on the Basis of Nature

There are four types of error on the basis of nature:

1. Errors of Omission
2. Errors of Commission
3. Errors of Principle
4. Compensating Errors

1. Errors of Omission

Errors of omission occur when a transaction or an item is left out completely from the accounting records. These types of errors can result in the trial balance being unequal or inaccurate financial statements. Examples of errors of omission include forgetting to record a purchase, sale or expense, or omitting a balance from the trial balance. It is important to rectify errors of omission as they can lead to serious accounting discrepancies and misstatements.

2. Errors of Commission

Errors of commission occur when an incorrect entry is made in the accounting records. These errors arise due to mistakes in calculation or data entry, misinterpretation of information, or incorrect understanding of accounting principles. Examples of errors of commission include wrong posting of transactions, incorrect classification of accounts, errors in addition or subtraction, and incorrect application of accounting principles. These errors can result in inaccurate financial statements and must be corrected to ensure the accuracy of the accounting records.

Errors of commission have three parts:

1. Error of Recording: This error arises when any transaction is incorrectly recorded
2. Error of Casting: This error arises when a mistake is committed at the time of totaling.
3. Error of Posting: This error arises when information recorded in the books of original entry is incorrectly entered in the ledger.

3. Errors of Principle

Errors of principle refer to the accounting mistakes that occur when the transactions are recorded against the accounting principles. These errors occur when transactions are recorded against accounting principles that do not apply to that transaction. For example, if a capital expenditure is treated as a revenue expenditure, it would be an error of principle.

An error of principle does not affect the trial balance, but it does affect the profit and loss account and balance sheet. These types of errors must be corrected through the rectification entry, and the accounts need to be adjusted accordingly.

4. Compensating Errors

These are those errors, the effect of which is nullified or is negated by another error of equal amount. For example, Rahul’s account was debited with ₹ 100 instead of ₹ 1000 while Raj’s account was debited with ₹ 1000 instead of ₹ 100. Therefore, Rahul’s account which was debited by ₹ 900 less was compensated by another error in Raj’s account, whose account was debited in excess of ₹ 900. These errors do not affect the trial balance.

Suspense Account

Suspense a/c is an a/c where in the difference in the trial balance is placed temporarily. The suspense account is credited, if the credit side is short and if the credit side is bigger, this amount will be debited.

Suspense account is used for rectifying all one sided errors. The opening balance in the suspense a/c will be equal to the difference in the trial balance.

FAQs on Accounting Errors