Accounting Errors – Meaning, Causes and Types

The errors or mistakes which are committed in the journal, ledger and any other financial statements are known as accounting errors. Accounting errors may be defined as those mistakes which are generally committed while recording the financial transactions in the book of accounts. 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 lack of the knowledge of accounting principles and rules. Generally, accounting errors are unintentional. However, it may intentionally be committed so as to take some undue advantage. Accounting errors distort the true business results. Therefore, these errors must be properly located and rectified for ascertaining the true profit or loss and financial position of the business.

Major Causes of Accounting Errors

There can be several causes of accounting errors. The following are the important ones:

• Lack of Knowledge: Accounting is based on certain principles and rules. Due to the lack of knowledge of the accounting principles and rules, accounting errors may be occur.
• Carelessness: Carelessness may be another reason by which accounting errors may be occur. If the person responsible for keeping books of accounts is not careful in her/his job such errors may crop up.
• Ineffective Internal Check: Ineffective internal check system may also cause accounting errors. Ineffective check does not help preventing accounting errors rather it encourages them.
• Dishonesty: If the person who is responsible for keeping books of accounts is dishonest, he/she may intentionally commit errors in the books of accounts for the purpose of taking undue advantage.
• Computer Flaws: A modern business keeps its accounts in computer. However, defective computer program and easy access to unauthorized person to the accounting program may also result in the accounting errors.

Types of Accounting Errors

Accounting errors can be classified into two types according to their common characteristics. These are as follows:

1. Accounting Errors based on their Nature
2. Accounting Errors based on Disclosure by Trial Balance

The accounting errors based on their nature can be of the following types:

1. Clerical Errors: The errors which are committed by accounting clerks are called clerical errors. These errors are committed in the process of recording financial transactions. These take place due to the carelessness of the clerk responsible for recording financial transactions. Clerical errors are also called technical errors. The principal types of clerical errors are as follows:
   1. Errors of Omission: The errors committed by not recording a transaction either in the book of original entry or in the ledger book are errors of omission. Such an omission may be either complete or partial.
      • Complete Omission: Complete omission takes place if a transaction is not recorded in the journal at all. for example, goods sold to John for $1000 were not recorded in the sales book at all. A complete omission of transaction may occur due to many reasons such as sales invoice misplaced or lost.
      • Partial Omission: Partial omission occurs if a financial transaction is recorded only partially. For example, partial error of omission occurs if goods sold to John for $ 4000 is recorded in sales book but failed to be posted in John’s account.
   2. Errors of Commission: The errors which are committed while recording or posting a transaction are called errors of commission. Errors of commission may take place either in the journal or in the subsidiary books, or in the ledger. Such errors include posting wrong amounts, posting on wrong side of accounts, wrong totaling or carrying forward, and wrong balancing. For example, if purchase of goods for $10,000 is entered as $1000 in the journal or in the ledger, such error is called errors of commission.
   3. Compensating Errors: Compensating errors refer to two or more errors which mutually compensate the effects of one another. If one error balances the effect of another error, then the two error are called compensating errors. For example, goods sold for $5000, but wrongly posted to the customer’s account as $500. Similarly, goods purchased for $5000, but by chance, wrongly posted to the supplier’s account as $500 . The errors in the personal account are compensated by each other, as $4500 short on the debit side of the customer’s account and on the credit side of the supplier’s account.
   4. Errors of Duplication: Errors of duplication are those errors which arise because of double recording. Double posting of a transaction from journal or subsidiary books to ledger also create such errors. For example, goods sold to John, but this transaction is wrongly entered twice or more in the sales book or wrongly posted twice or more in John’s account then it is called the errors of duplication.
2. Errors of Principle: Errors of principle are those errors which occur by violating the principles of  accounting. Errors of principle may occur due to wrong allocation between capital and revenue expenditure, or wrong  valuation of assets. For example, debiting the wage account instead of  machinery  account for the wage paid to the mechanics used for the installation of machine and debiting the customer’s account instead of cash account for the cash sales made. Errors of principle may also occur due to wrong valuation of assets by higher level staff.

The accounting errors based on disclosure by trial balance can be of the following types:

1. Accounting Errors shown by Trial Balance: The errors that effect the agreement of the trial balance are called the errors shown by trial balance. The following are the errors that affect the totals of trial balance.
   • Partial Omission: If a transaction is recorded or posted partially in  the journal  or in the ledger, such an error affects the agreement of the trial balance. For example, the total of trial balance disagrees if goods costing $600 sold to Mr. Jack on credit is recorded in sales book but no posting is done in Mr. Jack’s account. Similarly, failure to carry forward the balance of $5000 of the purchase return account to the trial balance also affects the totals of trial balance.
   • Posting a wrong amount in an Account: Posting a wrong amount from the book of original entry to a ledger account affects the total of trial balance. For example, cash of $10,000 received from XYX was posted in cash book but only $1,000 was posted in XYZ’s account. Such an error affects the agreement of the trial balance.
   • Posting on the wrong side of an Account: If an amount is posted on the wrong side of an account from the book of original entry, such an error affects the totals of trial balance. For example, stationary costing of $500 purchased from XYZ recorded in the journal was wrongly posted on the debit side of XYZ’s account.
   • Wrong casting of subsidiary books and wrong balancing of an account: Incorrect totaling of subsidiary books and balancing of ledger account also result in the disagreement of the trial balance. For example, if sales return book was incorrectly totaled as $100 instead of $1,000 and if the debit side of electricity account incorrectly balanced $12,000 instead of $1,200, then the total of the trial balance is adversely affected.
2. Accounting errors not shown by trial balance: The errors that do not affect the agreement of trial balance are called the errors not shown by trial balance. That means, the trial balance agrees if such errors exist. The following are some of the errors not shown by trial balance.
   • Complete errors of omission: The complete omission of recording a financial transaction in the boom of original entry or omission of posting an entry from journal to ledger accounts makes no impact on the totals of the trial balance. The totals of trial  balance remain equal as no posting takes place on the debit and credit sides of accounts. For example, cash of $400 received from Miss Lily was omitted to record in journal. similarly, the sale of goods for cash amounting to $2,000 was recorded in journal but no posting was made in cash account as well as in sales account. These complete omissions do not affect the totals of trial balance.
   • Posting a wrong amount in subsidiary books and ledger: Entering a wrong amount for instance $4,000 is purchase book for the purchase of goods costing $4,500 from XYZ company cannot reveal by trial balance.
   • Posting in wrong account: If an amount is wrongly posted on the right side of a wrong account then the error will not be affect the agreement of trial balance. Payment of $3,000 made to Mr. Tom was wrongly posted on the debit side of John’s account, will certainly not affect the trial balance totals.
   • Compensating Errors: Compensating errors are also not shown by the trial balance. For example, $500 posted in the costumer’s account for sale of goods for $5,000 and $500 posted in the supplier’s account for purchase of goods for $5,000 compensate their affects on the trial balance as both the accounts remained short of $4,500 on the debit and credit sides respectively. Hence, the trial balance would still be in agreement.
   • Errors of duplication: The errors of duplication are also not revealed by the trial balance. For example, the totals of trial balance will be in agreement even though wage of $ 500 paid for the month of June 2010 was recorded twice in cash book.

Methods of Locating Accounting Errors

If any errors exists in the books, it affects the accuracy of results of business operations revealed by the financial statements. Therefore, the error must be located for its rectification. The task of locating error is, however not easy. The location of errors will be easier if the following steps are systematically taken.

• Check the total of the trial balance.
• Compare the ledger account balances carried to the trial balance.
• Check the total of debtors’ and creditors’ accounts and compare with the balance of debtors’ and creditors’ amounts shown in the trial balance.
• Verify the total of subsidiary books and their posting to ledgers.
• Compare the items of trial balance of the current year with the items of trial balance of the previous year to see if any balancing figure is omitted.
• Verify that all journal entries are posted into ledgers.