Identification and Explanation of Different Types of Errors
Identification and Explanation of Different Types of Errors
Types of Accounting Errors
Transposition Errors:
- This type of error happens when two digits within a number are swapped around, for example recording 56 as 65.
Omission:
- An omission error occurs when a financial transaction is completely left out from the accounting records.
Error of Principle:
- It occurs when a financial transaction is recorded against the fundamental principles of accounting, such as recording a personal expense as a business one.
Duplication Errors:
- This happens when the same transaction is recorded more than once in the books of accounts.
Commission Errors:
- An error of commission occurs when a transaction is recorded in the correct amount and the correct class of accounts but allocated under the wrong subsidiary accounts.
Errors Detection and Explanation
Balancing of Accounts:
- Regular balancing of ledger accounts can aid in identifying any discrepancies that might be due to some error.
Trail Balance Checking:
- Regular checking of trial balance is another method to track down the errors.
Bank Reconciliation:
- A thorough bank statement reconciliation helps identify errors like unnoted bank charges, non-recorded cheques, duplication or any other discrepancies related to the bank transactions.
Physical Audit:
- Having periodic physical audits, especially for inventory or fixed assets, facilitates detection of errors or fraud.
Impact of Accounting Errors
Misrepresentation of Financial Statements:
- Errors can lead to misrepresentation of financial statements, showcasing a wrong financial health of the business.
Compliance Issues:
- Incorrect financial records could lead to non-compliance with the tax obligations, legal requirements or standard accounting practices and may result in penalties.
Operational Decisions:
- Accounting errors might also affect the operational and financial decisions such as budget planning, profitability analysis, or investment decisions.
Trust and Reputation:
- Frequent errors could affect the trustworthiness and reputation of the business in the eyes of the stakeholders, lenders, and investors.