Accounting Errors Definition Examples Top 4 Types

Accounting Errors Definition

Types of Accounting Errors with Examples

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#1 – Error of Omission

An error of omission is a business transaction or event not recorded in the books of accounts by mistake. Further classifications of Error is Omission are:

Where a transaction is not recorded in Journal or not at all posted in the respective ledger accountsLedger AccountsLedger in accounting records and processes a firm’s financial data, taken from journal entries. This becomes an important financial record for future reference. It is used for creating financial statements. It is also known as the second book of entry.read more.

For example, ABC Inc. bought a new software worth the US $ 3000.00 from Z Tech Inc. for business purposes but accidentally forgot to enter it in the books of accounts.

Or, ABC Inc. posted the following entry to record the above transaction in the Journal.

However, the company forgot to post the recorded amount in respective ledgers, i.e., Software A/c and Z Tech Inc. A/c by the US $ 3000.00, classified as an error of complete omission.

However, a transaction recorded in the primary book or Journal omitted to post in either one of the ledgers is called Partial Omission.

In the above example, Partial Omission happens if the software purchase from Z Tech Inc. is posted in Software Ledger A/c but forgotten to post in Z Tech Ledger A/c.

#2 – Error of Principle

An error of Principles happens when a fundamental accounting principleAccounting PrincipleAccounting principles are the set guidelines and rules issued by accounting standards like GAAP and IFRS for the companies to follow while recording and presenting the financial information in the books of accounts.read more is violated while recording financial transactions. This error occurs when:

Revenue expenditureRevenue ExpenditureRevenue expenditure refers to those costs incurred during regular business operations by the organization while availing its benefits in the same period. Such operating expenses include rent, utility expenses, salary, insurance expenses, etc.read more / Incomes are treated as Capital ExpenditureCapital ExpenditureCapex or Capital Expenditure is the expense of the company’s total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year.read more / Incomes or vice versa;Operating ExpensesOperating ExpensesOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more / Incomes classified as Non-operating expensesNon-operating ExpensesNon operating expenses are those payments which have no relation with the principal business activities. These are the non-recurring items that appear in the company’s income statement, along with the regular business expenses.read more / Incomes or vice versa;Personal Expenses are considered as Business ExpensesBusiness ExpensesBusiness expenses are those incurred in order to successfully run, operate, and maintain a business. Travel & conveyance, salaries, rent, entertainment, telephone and internet expenses are all examples of business expenses.read more or vice versa;

For instance, ABC Inc. is in the business of trading Furniture. The company bought new furniture for US $ 5000.00 to resell. However, the accounts executive at ABC Inc. accidentally debited the Furniture A/c (as an asset – capital expenditure) instead of Purchases A/c (as an inventory – Revenue Expenditure).

As the company is in the business of trading furniture, the purchase of furniture is a revenue expenditure. It should be debited in the Purchase A/c instead of the Furniture account.

#3 – Error of Commission

This error refers to the transaction recording with the wrong amount or in the wrong account. The following examples are the occurrence of the error of commission:

Recording the wrong amount in the correct books of accounts

Rent of US $ 100.00 paid to John gets recorded as

Posting the wrong amount in the correct ledger account

Rent of US $ 100.00 paid to John gets recorded in the credit side of cash A/c as

Posting the correct amount in the wrong account

Say Rent of US $ 100.00 paid to John gets recorded as:

Posting the correct amount on the wrong sideSalary paid of US $ 1,000 gets recorded in the credit side of the salary account for the US $1,000.Posting the same amount twice in the Ledger Commission of US $ 200 received from Tony gets recorded twice in the commission account.The wrong casting of the subsidiary books accountsThis accounting error happens in the totaling of the subsidiary books.Example: The total of the debit side of the Machine Account, which is the US $ 5,050.00 gets recorded as the US $ 5,005.00Wrong balancing of the ledger accountsThis error may cause the short or excess balance in ledger accounts

#4 – Compensating Errors

These errors occur when the effect of one transaction offsets the effect of another and nullifies the final effect on the Trial Balance.

For instance, ABC Inc. received the US $ 10,000 from Mark and paid US $ 1,000 to Jim. Now, if Mark A/c got credit by the US $1000 and Jim’s A/c got debit by the US $ 10,000, in such a case, an excess debt of US $ 9,000 will get nullified by shortDebit represents either an increase in a company’s expenses or a decline in its revenue. read more debitDebitDebit represents either an increase in a company’s expenses or a decline in its revenue. read more by the US $ 9,000. In this case, the trial balance will agree.

Impact of Accounting Errors on Trial Balance

If the trial’s total debit and credit side do not agree in book-keeping, some accounting error might occur, leading to disagreement. However, some errors do not affect the trial balance agreement yet may have been incurred. Thus it is important to understand the impact of accounting errors on Trial BalanceTrial BalanceTrial Balance is the report of accounting in which ending balances of a different general ledger are presented into the debit/credit column as per their balances where debit amounts are listed on the debit column, and credit amounts are listed on the credit column. The total of both should be equal.read more.