Accounting errors are unintentional mistakes in book-keeping of transactions. Accounting errors are different from accounting fraud because in fraud an intentional mistake is made to misrepresent financial information or to conceal misappropriation of assets.
Accounting errors are easier to identify when they cause a difference between debit and credit totals of a trial balance. However accounting errors may not always cause a trial balance to imbalance, in which case they are relatively difficult to identify. Where a trial balance is imbalanced by accounting errors, the difference between the debit and credit totals of the trial balance is temporarily kept in suspense account until the errors are corrected.
Accounting errors can be broadly classified into the following types. Please note that different types of errors may have overlapping characteristics.
Errors of Principle
Errors that involve violation of accounting principles, misinterpretation of facts, unintentional unrealistic estimates or incorrect method of calculation. These errors are usually caused due to insufficient accounting knowledge.
It is in human nature to make mistakes. For example, an accountant may inadvertently enter an incorrect figure in accounts. Such errors are known as clerical errors. Clerical errors may be minimized with experience. Clerical errors have following sub-types:
- Arithmetic: Errors in calculations other than incorrect method of calculation.
- Input Errors: Incorrect figures input into accounting records. Most common input error is a transposition error in which a number is input with incorrect order of digits.
- Omissions: Forgetting to enter a transaction in accounting records.
- Misplacement: Entering a transaction in wrong account.
- Errors of Principle: Recognizing expense in wrong accounting period, recognizing unearned revenue as income instead of a liability, inconsistent application of accounting principles, etc.
- Arithmetic: Calculations such as 3+2×6 may be incorrectly done by performing addition before multiplication, thus arriving at 30 as the answer. However the correct answer is 15 because we have to perform multiplication before addition.
- Input Errors: Entering 120000 as 12000 or 2389 as 3289. These errors may be minimized by using comma as a seperater i.e. formating 120000 as 120,000.
- Omissions: Forgetting to record a purchase transaction.
- Misplacement: Recording amount receivable from Customer A in Customer B’s account.
Written by Irfanullah Jan