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An accounting error, like any other unintentional error, is an error found in an accounting entry. In most cases, the error is corrected as soon as the company finds it. If the company cannot solve the error, a deeper investigation is conducted.

An accounting error is different from fraud. Fraud happens intentionally to hide or change entries to benefit the firm. An accounting error is purely unintentional. There are several types of errors, but the most common accounting errors are entry mistakes or the use of wrong accounting principles by the clerks. 

Types of Accounting Errors

There are several types of accounting errors. Here are some of the most common accounting errors. 

Original entry

If a wrong amount is entered into an account, it’s called an error of the original entry. The error will be reflected in all the other related accounts as well.

Duplication

If the accounting entry is debited or credited two times for the duplicate entry, it’s called an error of duplication. 

Omission

If an entry wasn’t made for a transaction that had taken place for the period, it’s called an error of omission. This is expected when there are too many invoices from vendors. Some invoices may not be recorded due to high volumes or negligence, or the invoice might get lost. 

Entry reversal

If one debt is recorded as a credit or vice versa, it’s called an error of entry reversal.

Accounting principle

If a wrong accounting principle is applied, it’s called an error of accounting principle. Let’s say a fixed-asset purchase is entered as a day-to-day operating expense. The entire balance sheet and income statement become incorrect. 

Commission

If an accountant adds a debit or credit to the correct account but the wrong subsidiary account or ledger, it’s called an error of commission. The money would be credited to the accounts receivable account but to the wrong customer. This error would be visible on all the accounts receivable subsidiary ledger that includes all of the customers’ invoices, transactions, and other details.

A payment to a vendor, recorded as an accounts payable, but processed to a wrong invoice or even a wrong vendor is also an error of commission. The error will be visible with the wrong vendor’s details on the accounts payable subsidiary ledger.

Compensating error

When one error has been compensated by another offsetting entry that, by chance, is actually another error, it’s called compensating error. Instead of balancing out, the entry will still have an error, but a different one. 

How do you prevent accounting errors?

Most accounting errors can be avoided if the journal keeper is extra careful and the accounting software is up to date. Nearly all companies spot these errors when the company conducts their month-end or end-of-week closings. Most errors are corrected easily. In case a material discrepancy isn’t resolved easily, an audit trail may be required. For immaterial discrepancies, companies might create a suspense account on the balance sheet or net out the insignificant amount as “other.”

A monthly bank reconciliation is the best way to spot errors before it’s too late during the reporting period at the end of the quarter or fiscal year. A bank reconciliation is basically a review and comparison of internal financial records with bank’s statement records for the company.

In the real world, a few errors may creep in no matter how careful one is or how good the system is. However, one can try their best to avoid errors or correct them as soon as they find them.

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