Types of Errors in Accounting and How to Prevent Them

The bookkeeping and accounting records play a vital role in helping you evaluate your small business’s financial health and performance and prepare for your taxes and other government compliance obligations. Therefore, it is crucial to ensure that your financial records are accurate and error-free.

Business record-keeping and accounting require collecting, entering, managing, and analyzing a lot of data; thus, these processes can be daunting tasks for you, your bookkeeper, and your accountant. As a result, there will be some time when you make some unintentional accounting mistakes. While some minor errors may not affect the numbers in your financial statements, others may cause a substantial impact on your books’ overall figures.

Accounting Errors

Different Types of Accounting Errors

Error of Omission

An error of omission occurs when a transaction item is overlooked and omitted from the books. Often, transactions are not entered because the entrepreneurs or their accountants fail to note documentation such as invoices or receipts in their accounting system. This can easily happen if the documentation is misplaced or lost.

Errors of Principle

The error of principle, also called an input error, does not meet the generally accepted principles (GAAP) guidelines. This error is an accounting mistake that can have enormous consequences.

Errors of principle occur when a transaction entry is recorded in the wrong account; the amount is correct, but the item is entered in the wrong place. The most common example of this is the accidental recording of a personal expense as a business expense in the books.

Errors of Reversal

A reversal error occurs when a debit transaction item is recorded as a credit or vice versa. For example, you posted an invoice you sent to a customer or client in the accounts payable instead of recording it in the accounts receivable.

Errors of Commission

An error of commission occurs when an item is mishandled and put in the wrong place. The amount entered is right and is recorded in the correct class but input in the wrong subsidiary ledger. For example, you received a payment on an invoice but noted the receipt against a different customer’s invoice.

Subsidiary Entries

An error of subsidiary entry occurs when transactions are not recorded correctly. For example, you entered a $500 invoice in your book’s accounts receivable as $5,000. This error is not easily detected, as your trial balance will be correct.

Transposition Errors

Transposition errors occur when transaction entries are incorrectly recorded due to transposing (or reversing) a number. For example, you recorded a $3765 invoice instead of a $6375 actual owing.

How to Mitigate and Prevent Accounting Errors?

As mentioned, some of these accounting errors are simple data entry errors, but these can still significantly impact your accounting records and can be costly for your business. Hence, while you cannot avoid committing a mistake when proceeding with your accounting process, you can implement some strategies to mitigate and prevent these errors from happening or escalating.

Adopt the best accounting practices and standards.

Implementing good accounting practices can help you keep your accounting and bookkeeping processes on the right track, as well as maintain accurate and up-to-date records. Such accounting practices include determining which accounting method to use, updating the chart of accounts, and meticulously managing your accounts payable and accounts receivable.

Conduct periodic reviews of accounts.

Regularly reviewing your books and ledgers and performing bank reconciliation will help you see discrepancies within transaction records immediately and resolve these issues promptly.

With periodic accounting reviews, you can evaluate and balance the accounts in your general ledger. Consequently, by reconciling your books and bank statements, you can address and eliminate errors before they become significant financial setbacks, hampering your operations and growth.

Utilize modern accounting tools.

Replacing your conventional accounting systems with modern accounting solutions can help you simplify the tedious task of recording transactions and other financial records. You can leverage small business accounting software programs from companies like KIPPIN to easily categorize transactions and efficiently generate balance sheets, reducing the possibility of accounting errors occurring.

KIPPIN is a cloud-based accounting and bookkeeping service tailored to simplify the everyday tasks of businesses. We align our clients to top financial experts on our platform to take care of all your accounting and invoicing needs. We also provide software-only solutions to automate processes, making them quick, easy, and remotely accessible.

Contact us today at 1-905-581-9362 or email us at [email protected] You may also chat with us from our website and see our product and service lineup to learn more.



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