Common accounting errors can be the bane of any business. They can range from data entry errors to misunderstandings of accounting principles.
No matter the cause of your accounting errors, they can significantly affect your business’s financial health.
To understand how to fix these errors, you must first understand how they are caused and whether they can be prevented in the first place.
Error of omission
In simple terms: Failing to record a transaction or the supporting documents in the accounting records.
How can you spot an error of omission? Regularly reviewing and comparing your bank statements to your accounting records can help you spot any missed transactions.
You also need to look through your invoices and receipts to ensure they have all been filed correctly, ensuring that all purchases and sales are recorded.
Remember also to check your emails and contracts to see if any documents are missing that you need to record in your accounting.
How can you fix it? If the transaction occurred in the current accounting period, you can simply enter it into your accounting software and ensure that the associated details are correct.
If the error occurred in a previous accounting period, you’ll need to create a journal entry that includes the date of the transaction so that it is recorded correctly.
Error of commission
In simple terms: Although the correct amount has been recorded, the entry has been made in the wrong account.
How can you spot an error of commission? During bank reconciliations, it’s possible to spot errors that might not otherwise affect the overall look of your accounts.
How can you fix it? Typically, you must reverse the original accounting entry before you can enter it correctly. The difficulty here is spotting the error quickly before it can compound and create other errors that affect the overall accounts.
Error of principle
In simple terms: There are fundamental accounting principles that small business owners might not know, which can lead to accounting entries being made in ignorance. For example, a capital expenditure may be recorded as a revenue expense.
How can you spot an error of principle? Typically, as a business owner, you won’t necessarily spot them, but your accountant should catch them and correct them on your behalf.
Compensating error
In simple terms: There may come a time when your errors seemingly cancel each other out. For example, certain assets may be overstated, and others may be understated by the same amount, meaning the balance sheet still balances, hiding the error.
How can you spot a compensating error? The honest answer, with great difficulty. Because two or more errors are cancelling each other out, it can be extremely difficult to track down the source of the error. However, if you keep tight control of your accounting and meticulous records, spotting these errors is possible.
How can you fix it? There is no single fix for these errors because no single error creates them. The only fix is to go through your accounts and correct the individual errors you come across in a way that makes sense for the type of error.
Duplication error
In simple terms: Accidentally entering a transaction more than once.
How can you spot a duplication error? When reconciling your accounts, you should be able to spot any duplication.
How can you fix it? If the error is in the current financial period, you should be able to remove the transaction from your accounts without it affecting anything. However, if the error happened in a previous period and has only just been caught, then you need to create a journal entry that removes the transaction.
Transposition error
In simple terms: Accidentally switching numbers when entering a transaction, for example, £3506 rather than £3560 or £35 rather than £53.
How can you spot a transposition error? Compare the total transaction value to the original invoice value.
How can you fix it? While it can be tempting to delete the entry and pretend that it never happened in the first place, that’s not possible if the error is carried over multiple accounting periods. When this happens, you must create a journal entry to correct the error.
Error of original entry
In simple terms: Entering a completely wrong amount, for example, £1.00 rather than £100.00.
How can you spot an error of original entry? This is something that can be picked up during account reconciliation and checking against the original purchase receipt or invoice.
How can you fix it? The method used depends on the error itself. For example, it could be as simple as removing a bank entry and re-entering it correctly, or it could be more complex and require journal entries.
How can QuickFile help?
We aim to simplify accounting for your business, whether it’s correcting mistakes or creating journals.
Also, through the use of Bank Feeds, you can stop relying on entering your transactions manually, which can prevent many of these errors from happening in the first place.