Types of Errors in Accounting

ACCOUNTING ERROR

When the business transactions are recorded in the books of accounts there remains a possibility of accounting errors. It may be because of hastiness in writing, negligence, oversight or incomplete knowledge of the principles of accountancy. Some times in order to manipulate the books of accounts, errors are committed intentionally.

Irrespective of whether the accounting errors are committed innocently or intentionally they cannot be rectified by erasing with the help of an eraser. Necessary accounting effects are to be given in accounts in order to rectify these errors. Sometimes in an error affects two accounts. In order to rectify the same, a journal entry is passed which is known as a rectification entry and it is recorded in journal proper

Table of Contents

• MEANING OF ACCOUNTING ERRORS
• TYPES OF ACCOUNTING ERROR
• ERROR OF OMISSION
• ERROR OF COMMISSION
• COMPENSATING ERROR
• ERROR OF PRINCIPLE

MEANING OF ACCOUNTING ERRORS

Accounting errors are the mistakes committed in book-keeping and accounting. The mistake may be one relating to routine or one relating to principle. Accounting error is unintentional mistakes in book-keeping of transactions. Accounting error is different from accounting fraud because in fraud an intentional mistake is made to misrepresent financial information or to conceal misappropriation of assets.

An error of principle is an accounting mistake in which an entry is recorded in the incorrect account, violating the fundamental principles of accounting. The type of error is the error of principle and clerical error. The clerical error includes the error of commission, the error of omission, compensating error, and error of principle.

TYPES OF ACCOUNTING ERROR

• Error which does not affect the trial balance.

• Error which affects the trial balance.

ERROR WHICH DO NOT AFFECT THE TRIAL BALANCE:

• Errors of omission
• Error of principle
• Error of recording to a wrong account
• Errors committed at the time of recording in primary books (Error of commission)
• Compensatory errors

READ ALSO: WHAT IS MERGER AND ACQUISITION?

ERROR WHICH AFFECTS THE TRIAL BALANCE:

• Error regarding posting balance of an account
• Errors in totaling the subsidiary books.
• Errors committed at the time of preparing the trial balance.

(1). ERROR OF OMISSION

An error of omission is an error when a transaction is completely or partially omitted from being recorded in the books of accounts. When a transaction is completely or partially omitted to be recorded in books of accounts it is called error of omission. Goods purchased on credit from Mr. A, this transaction is not recorded in the purchase journal. This is called an error of complete omission.

EXAMPLE: Rs. 1000 received from Rahul is left unrecorded.

RECTIFICATION: BY writing a correct journal entry for this transaction the above error will be rectified.

(2). ERROR OF COMMISSION

It is those errors which arise due to wrong recording, wrong posting, wrong carrying forward, wrong casting (totaling) of subsidiary books, wrong balancing.

• Error of recording- the wrong amount

• Error of casting- totaling error

• Error of carrying forward

• Error of posting on the wrong side

• Error of commission results in disagreement of trial balance.

EXAMPLE: Goods of Rs. 5000 purchased from Mayuri is recorded by mistake as Rs. 500.

RECTIFICATION: To rectify the error reverse entry will be passed with the number of different Rs. 4500

(3). COMPENSATING ERROR

When one mistake nullifies the wrong effect of another it is called a compensating error. These are two or more errors in number and balance each other. These are generally arithmetical errors.

EXAMPLE: The total purchase book is overcast by Rs. 500 and receipt of Rs. 500 from Anita is posted to her account by Rs.1000.

RECTIFICATION: To rectify this we will debit the Anita account and credit purchase account by 500.  

READ ALSO: ACCOUNTING CONCEPTS AND PRINCIPLES

(4). ERROR OF PRINCIPLE

These are errors arising from net observing the accounting principles correctly eg wages paid for the installation of machinery debited to wages a/c, purchase of fixed assets on credit recorded in the purchase journal. These errors will not affect the trial balance.

EXAMPLE: Rs. 2000 worth furniture purchase is debited to purchase accounts. Here purchase of furniture should be debited to furniture account but purchase account is wrongly debited by Rs.2000.

RECTIFICATION: To nullify this effect, purchase account should be credited by Rs.2000, and furniture account is to be debited by Rs.20000.

(5). ERRORS OF RECORDING TO A WRONG ACCOUNT

In such type of an error, journal entry is written correctly but while posting, instead of giving the effect to the correct account by mistake the effect is given to some other account. Thus by debiting or crediting a wrong account with correct amount, on the correct side, the trial balance remains unaffected.

EXAMPLE: Rs. 100 received from Rahul, is credit to  Rohan’s account. Here at the time of posting, instead of Rahul’s account, Rohan’s account is wrongly credited.

RECTIFICATION: To cancel the wrong effect, debit Rohan’s account and give the correct effect, credit Rahul’s account. Thus, the error will be rectified.