Accounting Errors and Corrections

Types of Error in Accounting

Accounting errors can occur in double entry bookkeeping for a number of reasons. Accounting
errors are not the same as fraud, errors happen unintentionally, whereas fraud is a deliberate and
intentional attempt to falsify the bookkeeping entries.
An accounting error can cause the trial balance not to balance, which is easier to spot, or the error
can be such that the trial balance will still balance due to compensating bookkeeping entries,
which is more difficult to identify.

Accounting Errors that Affect the Trial Balance

Errors that affect the trial balance are usually a result of a one sided entry in the accounting records
or an incorrect addition.
Irrespective of the reasons why a trial balance may not balance, as a temporary measure the
difference in the trial balance is allocated to a suspense account and a suspense account
reconciliation is carried out at a later stage.
For example, suppose the trial balance showed total debits of 84,600 but total credits of 83,400
leaving a difference of 1,200 as shown below.

Account Debit Credit

Trial Balance Totals 84,600 83,400
Difference 1,200
Total 84,600 84,600
Suspense Accounts – Trial Balance Difference

To make the trial balance balance a single entry is posted to the accounting ledgers in a suspense
account.

Account Debit Credit

Suspense account 1,200
Suspense Account Posting
When the accounting error is identified a correcting entry is made. Suppose the difference was an
addition error on the rent account, then the correcting entry would be as follows:

Account Debit Credit

Suspense account 1,200
Rent 1,200
Suspense Account – Accounting error correction

Errors which do not affect the Trial Balance

Accounting errors that do not affect the trial balance fall into one of six categories as follows:
1. Error of Principle in Accounting
2. Errors of Omission in Accounting
3. Error of Commission
4. Compensating Error
5. Error of Original Entry
6. Complete Reversal of Entries

Error of Principle in Accounting

An error of principle in accounting occurs when the bookkeeping entry is made to the wrong type
of account. For example, if a 1,000 sale is credited to the sundry expenses account instead of the
sales account, the correcting entry would be as follows:

Account Debit Credit

Sundry expenses 1,000
Sales 1,000
Accounting Errors – Error of Principle in Accounting Example

Error of Omission in Accounting

Errors of omission in accounting occur when a bookkeeping entry has been completely omitted
from the accounting records.
If the payment 2,000 to a supplier has been omitted then the correcting entry would be as follows:
 Account Debit Credit
Accounts payable 2,000
Cash 2,000
Accounting Errors – Errors of Omission in Accounting
Example

Error of Commission
An accounting error of commission occurs when an item is entered to the correct type of account
but the wrong account. For example is cash received of 3,000 from Customer A is credited to the
account of Customer B the correcting entry would be.

Account Debit Credit

Accounts receivable – Cust. B 3,000
Accounts receivable – Cust. A 3,000
Accounting Errors – Error of Commission

Compensating Error
A compensating error occurs when two or more errors cancel each other out. For example, if the
fixed assets account is incorrectly totalled and understated by 600, and the rent account is
incorrectly totalled and overstated by 600, then the posting to correct the error would be as
follows:

Account Debit Credit

Fixed assets 600
Rent 600
Accounting Errors – Compensating Error

Error of Original Entry

An error of original entry occurs when an incorrect amount is posted to the correct accounts.
A particular example of an error of original entry is a transposition error where the numbers are
not entered in the correct order. For example, if cash paid to a supplier of 2,140 was posted as
2,410 then the correcting entry of 270 would be.
A good indicator for a transposition error is that the difference (in this case 270) is divisible by 9.

Account Debit Credit

Cash 270
Accounts payable 270
Accounting Errors – Error of Original Entry