What are Accounting Errors?
Accounting errors refer to the commission of errors while making an accounting entry that is unintentional, i.e. non-fraudulent in nature. To be specific, these are bookkeeping errors that need to be located and fixed, to ensure the true and fair view of the financial statements.
Reasons for Errors in Accounting
- Carelessness while maintaining accounts.
- Lack of complete knowledge of accounting.
Hence, the errors occur due to:
- Arithmetic inaccuracy
- Inability in applying the accounting principles properly
- Absence of relevant information.
Types of Errors of Accounting
There are two broad categories in which the accounting errors are classified, these are:
Error of Principle
When the accounting principles are not followed correctly while recording the transactions, it is called an error of principle.
Main areas of error of principle
- Treatment of capital expenditure as revenue expenditure
- Treatment of revenue expenditure as capital expenditure
- Treatment of capital income as revenue income
- Treatment of revenue income as capital income
Error on the part of the accountant while entering the transaction are clerical errors. It is divided into seven categories:
Error of Omission
Omission means left out, and so if the transaction is left out either partially or fully such an error is called an error of omission. These take place when the transactions are not recorded in the primary books like journals and so they are difficult to identify. It is further classified into:
- Error of Partial Omission: When the transaction is recorded in the journal but not posted in the ledger, it is called an error of partial omission.
- Error of Complete Omission: When no entry for the transaction is made in the primary book of recording, it is termed as an error of complete omission.
Error of Commission
An error of commission occurs due to the wrong positing, balancing, casting, carrying forward, calculating, and so forth. These may or may not have an impact on the trial balance.
Reasons for Error of Commission
- Wrong amount is recorded in the subsidiary books
- Undercasting or overcasting of subsidiary books
- Wrong amount is posted in the ledger accounts
- Posting at the wrong side of the ledger account
- Incorrect balancing of ledger account
Types of Error of Commission
- Error of Misposting: When the transactions neither recorded properly nor posted in the account in place of the correct book or ledger. Such errors are called errors of misposting. And so the transaction is posted in an account that is different from the account in which they need to be posted.
- Transposition Error: When the digits in the amount of the transaction are reversed by the accountant, such an error is called a transposition errors.
- Duplication Error: Duplication Error refers to the error when an entry is posted twice, it is called a duplication error.
- Error of Entry Reversal: When an accounting entry is reversed, i.e. the account which is to be debited is credited and the one to be credited is debited, it is called an Entry Reversal Error.
Errors that compensate or nullify the effect are called compensating errors. In the case of compensating errors, one set of errors are adjusted with another set of errors with the same amount. Hence, the set of errors contain multiple errors. Further, irrespective of the reason and nature of the errors, they need to be corrected so as to determine the true and fair view of the financial position of the firm.
Aspects of Errors in Accounting
Errors disclosed by Trial Balance: These errors do not affect Trial Balance:
- Wrong casting (totaling)
- Posting of the wrong amount
- Error in carrying forward the total of one page to the following page
- Posting of amount on the wrong side
- Wrong balancing of account
- Omission of an account balance while creating trial balance.
- Incomplete double entry
Errors not disclosed by Trial Balance: These Errors affect Trial Balance:
- Error of Omission
- Error of Commission
- Error of Principle
- Compensating Errors
- Wrong entry in subsidiary book
- Duplication Error
- Transposition Error
What is Suspense Account?
A suspense account is an account opened in which the difference in the trial balance is placed, till the identification and rectification of errors are not complete. And so, once the errors are rectified along with the location of the causes of the errors, the suspense account needs to be closed. And necessary rectification entries for the errors committed will have to be made in the books.
Therefore, the main purpose of opening a suspense account is to avoid unnecessary delay in the preparation of the final accounts which are prepared only after the preparation of the trial balance. And so, it helps in the preparation of the financial statement even when there is a non-agreement of trial balance.
Making mistakes while entering the transactions in the books of accounts is quite common. If the books of accounts contain errors, then it is quite obvious that the financial result and financial position of the enterprise are not disclosed correctly. Hence, they need to be rectified prior to the preparation of the final accounts of the enterprise. And to do so, accounting principles must be followed as prescribed.