In double-entry bookkeeping operations, errors in accounting refer to a non-fraudulent error. Most mistakes are caused by carelessness or a bookkeeper’s lack of expertise in accounting. Investigative steps should be taken immediately as an error is found, and solutions should be made. Over time, allowing mistakes to build up in the ledgers might make them hard to identify and fix.
Accounting fraud, compared to an accounting error, refers to the purposeful production or misrepresentation of the entity’s financial affairs. Do not confuse the two. Simply fixing mistakes is all that is required. Fraud needs to be prosecuted. If you encounter such errors in your business, you need small business accounting services in Bonita Springs, FL.
How do you minimize accounting errors in a business?
Errors in accounting that impact the trial balance
Identifying errors that cause the trial balance to be out of balance is not difficult. The following two faults are often seen when the ledger accounts are out of balance.
- The error of omission: A discrepancy in the trial balance is caused by deleting a portion of a double-entry transaction. For example, the bookkeeper could enter a debit in a particular account without matching it with another credit.
- The error of commission: Errors involve recording mismatched amounts in equal credits and debits and entering two credits or debits in place of a single credit and an offsetting debit.
Correcting Accounting Omission Errors
An omissional error occurs when a financial transaction is missing from the company’s accounting records. There are frequently two types of errors:
- A complete error of omission- The bookkeeper completely failed to enter the transaction
- Partial error of omission- The transaction has only been entered on one side of the ledger.
- Clerical errors are a common term to refer to errors of commission. It happens when an incorrect value gets recorded in the ledger. For example, the accountant recorded a product transaction for $400 instead of the $4,000, which is the actual value. A commission error has to be fixed by first reversing the incorrect amount and then entering the right amount.
- When two mistakes in detached accounts equalize one another, compensating errors occur. For example, your business charged a person $500 for a product and another $800 for raw materials. However, your bookkeeper recorded the purchase on one’s account and the sale on another’s account. The ledgers balance at the end of the day, but the amounts were added to and debited to the incorrect accounts. Reverse the wrong transactions and input the correct ones to correct a compensatory mistake.