Types of Errors

An accounting error is an unintentional error in an accounting entry. When an error or mistake is discovered, it is frequently corrected right away. If no immediate solution is found, an inquiry into the error is launched. Accounting error should not be confused with fraud, which would be the intentional concealment or alteration of entries for the benefit of the firm. Although there are many different types of errors, the most generally accepted accounting errors are either clerical errors or accounting principle errors.

Accounting Errors

Accounting errors are unintended bookkeeping mistakes that are sometimes simple to identify and correct. For example, if the debits and credits in the trial balance do not add up to the same amount, an accountant can easily determine which account is incorrect. The trial balance is a type of worksheet used by accountants to record debit and credit transactions. The trial balance totals are then carried over to the financial statements at the end of a reporting period. However, there are times when accounting errors exist but the trial balance is in balance, making it more difficult to identify and correct the errors.

Types of Accounting Error

Accounting errors come in many forms, and some of the most common are listed below. Trial balance errors are accounting errors that are not discovered by the trial balance sheet. Clerical errors and errors of principle are the two types of trial balance limitations. Humans make clerical mistakes. Principle errors occur when an accounting principle is not followed. Trial balance limitations are errors in the financial accounting that cannot be detected by the trial balance sheet. These errors are classified into two types: clerical errors and principle errors.

Error of Principle 

Accounting principle error occurs when an accounting principle is applied incorrectly. A purchase of equipment, for example, is recorded as an operating expense. The operating expenses are the day-to-day expenditures and do not include the purchase of a fixed asset. Furthermore, asset purchases must be recorded on the balance sheet, whereas operating expenses must be recorded on the income statement.

Trial Balance Clerical Errors

The errors that occurred as a result of the accounts department employees’ negligence are clerical errors.

Error of Original Entry 

When the incorrect amount is posted to an account, this is referred to as an error of the original entry. The error in posting the incorrect amount would be reflected in any of the other accounts associated with the transaction. In other words, all of the accounts would be in balance but for the incorrect amounts.

Error of Duplication 

Whenever an accounting entry is duplicated, it means it is debited or credited twice for the same entry. For example, if an expense was debited twice for the same amount, this would be considered a duplication error.

Error of Omission 

An omission error occurs when an entry is not made despite the fact that a transaction occurred during the period. When items are bought on credit, an accounts payable account, which is the short-term debt that a company owes suppliers and vendors, also isn’t credited. This is common when there are a large number of invoices from vendors that must be recorded, and the invoice is lost or not properly recorded. An omission error could also include failing to record the sale of a product to a customer or revenue received from accounts receivable. Accounts receivable are the funds owed to a company by customers for goods sold.

Error of Reversal of Entry 

An entry reversal error occurs when an accounting entry is posted in the wrong direction, i.e. a debit was recorded as a credit or vice versa. For example, the cost of goods sold, which includes raw materials and inventory, is credited rather than debited, whereas finished inventory is debited rather than credited.

Error of Commission 

When an accountant or bookkeeper records a debit or credit to the appropriate accounts but to the incorrect subsidiary account or ledger, this is referred to as an error of commission. For example, money received from a customer is properly credited to the accounts receivable account, but to the incorrect customer. The error would be visible on the receivables subsidiary ledger, which contains all invoices and transactions for customers. A payment to a vendor that is recorded as accounts payable but goes to the wrong invoice or vendor is also a commission error. On the accounts payable subsidiary ledger, the error would appear as a posting to the incorrect vendor.

Error of Compensation

When one error is compensated by an offsetting entry that is also incorrect, this is referred to as compensating error. For example, if an incorrect amount is recorded in inventory, it is balanced out by an incorrect amount being recorded in payables to pay for that inventory.

Conclusion

An accounting error is an unintentional error in an accounting entry. Accounting error must not be confused with fraud, which is the intentional concealment or alteration of entries for the benefit of the firm. Accounting errors can include recording the same entry twice, or recording an account correctly however to the wrong customer or vendor. An omission error occurs when no entry is recorded despite the fact that a transaction occurred during the period.