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.