Meaning and Effects of Errors

The faults committed to maintaining the books of accounts are called errors in accounting. The faults may arise due to mistakes in principle applied or in recording the information in the books. They may arise in recording the entries in the journal or secondary books or they may occur at the time of recording into the ledger. Therefore, errors may be carried out while recording, classifying, or summarizing the transactions in the books. The error may be the outcome of an act of not recording or recording it wrongly.

In book-keeping, if the sum of the debit and credit side of the trial does not match, there can be an existence of some error in the accounts, which led to the mismatch of the accounts. However, some errors do not disturb the arrangement of trial balance yet an error may have been incurred. Therefore, it is important to learn the impact of accounting errors on Trial Balance. 

Meaning of Error in Accounting

The errors or mistakes that occur while recording in the journal, ledger, and any other financial statements are known as accounting errors. Accounting errors may be termed as those mistakes which are generally found while recording the financial transactions in the books. These errors may be committed while recording the transactions in the journal and posting them in the ledger accounts. Such errors may be technically committed or committed due to a lack of knowledge of accounting principles and rules. Generally, accounting errors are unintentional. However, it may intentionally be committed to taking some undue advantage. Accounting errors distort the true business results. Therefore, these errors must be properly placed and corrected for evaluating the actual profit or loss and financial position of the business. 

Causes of Error

Lack of Knowledge: Accounting is done following certain principles and policies. Due to the deficiency of knowledge of the accounting principles and rules, accounting errors may arise.

Carelessness: Another reason by which accounting errors may occur can be carelessness or negligence of the accountant staff. If the person responsible for keeping books of accounts is not cautious in her/his job such errors may appear.

Ineffective Internal Check: Ineffective internal check systems may also source accounting errors. A negligent check does not help in preventing accounting errors but it promotes them.

Dishonesty: If the person who is responsible for custody books of accounts is dishonest, he/she may purposely commit faults in the books of accounts to take excessive benefit.

Computer Flaws: A modern business usually maintains its accounts on a computer. However, flawed computer programs and easy admittance of unauthorized persons to the accounting program may also outcome in accounting errors.

Effects of Error

Losses and Waste

The first and primary reason for preparing financial statements is to show a clear image of the position of the company to management. Management cannot assume to make operative decisions if the data upon which it forms those decisions are mistaken. For example, if accounting offers management financial statements that have faults in them, management may make transactions that place financial stress on the assets of the company. Likewise, such defective information may also cause management to miss possibly profitable opportunities under the assumption that the company is not capable enough of its resources to gain the opportunities.

Reputability

Financial statements are not just used by the management but are also used by the users of financial statements like the shareholders, government agencies, and the general public. Errors in financial statements can be a basis for people to drop confidence in the company and its employees. Even if the accounting department of the company rapidly corrects faulty statements, the recognition that such errors are possible may still affect people in losing trust in the company. Such a loss of reputation can cause public corporations to see a reduction in stock value. Certain companies may see a fall in business prospects, as potential members may not want to connect with a company that has a reputation for error.

Liability

Issuing wrong financial statements does not only cause the company to make poor management decisions but it can also cause other companies to make poor management decisions. For example, if errors in a financial statement show a company as having a financial position that is stronger than it is, other companies may plan to enter into a contract with the company when they otherwise would not enter. If such mistakes result in the other companies incurring losses, the other companies may file a civil case against the company to recover those losses.

Prosecution

In certain cases, errors on financial statements are not mistakes at all but are parts of wrong information that some party has put there to use in a particular condition. For example, management of the company may publish wrong financial information to artificially lower or expand the value of the stock, taking benefit of the change for buying or selling stock personally. If government officers rule that such financial statement errors are intended, the parties involved may face criminal action resulting in fines or imprisonment.

Conclusion

Errors may be carried out while recording, classifying, or summarizing the transactions in the books. The error may be the outcome of an act of not recording or recording it wrongly. Accounting errors may be defined as those mistakes which are generally committed while recording the financial transactions in the books. There are two types of error in accounting, namely the error of principle and the clerical errors. Such errors may be technically committed or committed due to a lack of knowledge of accounting principles and rules. Errors in financial statements can be a basis for people to drop confidence in the company and its employees. Management cannot assume to make operative decisions if the data upon which it forms those decisions are mistaken.