It is almost impossible to handle a large quantity of data without making mistakes. When it comes to accounting, the process has multiple steps where something can go wrong. These errors stem from an improper understanding of accounting principles or clerical mistakes. This is equally likely with cloud-based digital accounting. The UK accounting software has a lot of in-built systems to make the accounting process less tedious. However, your records are as good as the information you feed.
The tendency of making an error has been well studied. In fact, there are separate accounting treatments just to rectify the mistakes. To understand (and avoid) the errors, we must first get to know them. When you are familiar with potential mistakes, it is easier to find a way around them.
Accounting errors are classified into the following categories. Let us understand each one in detail.
Table of Contents
Types of accounting errors
Error of principle
Understanding the accounting rules is the most crucial aspect of bookkeeping. When an entry does not conform to the Generally Accepted Accounting Principles (GAAP), an error of principle occurs. Accounting principles indicate the correct treatment of every account. There are five main heads for classifying accounts– income, expenses, capital, assets, and liabilities. The treatment of increase and decrease in each of these is different. Any deviation from these rules leads to a mistake.
Apart from this, you prepare separate accounts for different purposes. You cannot consider purchasing an asset the same as buying stock. Similarly, there is a distinction between business expenses and personal expenses. An error occurs if you interchange the specific accounts.
For example, you purchase furniture for your office. This is an asset from an accounting point of view. When you enter this in the accounting books, the ‘furniture account’ is debited and the ‘bank account’ is credited. However, it is wrong if you debit the ‘purchase account’ instead. This is because the ‘purchase account’ is only used when stock is purchased. Any other use is regarded as incorrect.
Error of omission
As the name suggests, error of omission means skipping out on an entry. If you miss recording a transaction, this error occurs. UK accounting software can manage and extract all information for recording transactions. However, there is always a slight chance that such errors may occur.
An error of omission is of two types. The first is complete omission. This means that you have forgotten to enter the entire transaction itself. This error is tough to track as it does not cause any disbalance in totals. All information is thoroughly verified to avoid such mistakes. The accountant must be careful and alert when doing the job to ensure that no entry is skipped.
The second kind of error is of partial omission. According to the double-entry system of bookkeeping, every transaction has two sides – debit and credit. A partial error of omission occurs when only one aspect of the transaction is recorded. Let us take an example.
For instance, you purchase a machine and pay for it in cash. You record this entry in the cash book but skip it while entering data in the machinery account. This causes a disbalance in the credit and debit sides of the account. It is called a one-sided error. Due to this, it can be caught while balancing the accounts. The process of rectification is carried out to adjust this mistake. Accounting software in UK eases your task of error identification.
Error of commission
Errors of commission are commonly known as clerical errors. The UK accounting software prepares accounts based on the information you enter. There are a variety of mistakes that can be made while entering data. One example of this is duplication error. This means that you enter the same entry twice. While this does not disbalance the accounts, it reflects an incorrect balance.
More errors of the commission include totaling errors, miscalculations, posting mistakes. For example, if you receive payment from your debtor Mr. X. On receiving the amount, you by mistake credited the account of Mr. Y, who is another debtor. Even though the total amount comes out to be fine, the debt of the wrong person gets cleared in the books.
Another example can be when you enter a wrong amount in a correct entry. Let us say that you sold goods worth $5000. However, when entering this data, you put $6000 instead. This increases your balance and misrepresents your sales revenue. Reading so many zeroes can confuse anyone, so the accountant must be extra careful with the data.
Compensatory errors
Compensatory errors are those which cancel each other out. This implies that even though there are two mistakes in the books, none is reflected when the accounts are balanced. This can be better understood with an example. Say you received an income of Rs. $10,000. But you erroneously entered the amount as $12,000. This shows an overstated income. However, you also wrote a $2000 expense as $4000. This overstated the expense by the same amount. Being on the opposite sides of the equation, these cancel each other out. The account would still balance and the mistake would not reflect in the total.
How are errors detected and rectified?
Detection of accounting errors is done through various methods. The traditional way is creating a trial balance after ledger posting. This mentions the credit and debit balances on either side. If the total of both sides does not match, it indicates an error. A suspense account is opened to set off the mismatch.
A matching trial balance indicates there are no one-sided errors. However, this does not imply error-free books. As we mentioned before, double-sided errors do not affect balances. To avoid these, the accountants must be careful while entering the details. Proper understanding of the principles is also necessary. A lot of errors can be prevented by using cloud-based UK accounting software.
The UK accounting software helps in overcoming these problems. It has in-built features that simplify the accounting process and reduce the chances of errors. These also help in saving time by automating the task of bookkeepers.
To conclude
Every accounting professional must be well versed with the rules of bookkeeping. These must be complied with to avoid unnecessary errors. The introduction of accounting software in the UK has reduced the chances of human error by automating tasks. This has significantly saved a lot of time and resources.
