What are the ERRORS in Accounting and How to CORRECT them ?

Types of errors in accounting

          There are mainly five types of errors in accounting. These are the most frequent errors that you may come across while preparing your accounts.

1)    Error of transposition: - this is the error when we record the amount figure the wrong way around. For example: - $5987 is recorded as $5897.

2)    Error of omission:- failing to record the transaction in full or partially (partially means only the debit or the credit side of the transaction and not the corresponding entry is omitted)

3)    Error of principle: - when some fundamental principle is violated of the double entry system while posting an entry. This happens when the double entry is posted on the belief that the entry made is correct for the transaction. And finding out later that the entry made is wrong. (this can happen due to lack of knowledge also)

4)    Error of commission: - this happens when the bookkeeper posts the debit or the credit entry in the wrong account. When there is any addition error in the accounts it’s also referred as an error of commission.

5)    Compensating error: - this error occurs when the error coincidently becomes equal and opposite to another error. I.e. one error is neutralised with another error.

Correction of errors

          Once the error has been detected, it’s time to correct them.

If the correction of error involve a double entry in the subsidiarybooks, then to correct the error a journal entry is required.

If the error breaks the double entry rules, then it is corrected with the help of a suspense account or a journal entry as required.

Errors that can be detected by a trial balance (the trial balance does not tally if these errors are present) are:-

·       Error of transposition

·       Error of omission (one sided)

·       Error of commission (one sided)

What is a suspense account?

          When an accountant can’t find the error with his max capabilities and the trial balance does not tally, then for the time being he opens a new account called the suspense account and tallies the trial balance by transferring the difference to this newly opened account (suspense account). When the error is discovered, it is corrected and the suspense account is closed.

Suspense account is also prepared so that there is no delay in the preparation of financial statements. But in no case should the suspense account be seen in the final statements of the organisation at the end of an accounting period.

           Suspense account can also be opened when the bookkeeper does not know where to post the corresponding double entry for a transaction that he comes across. When the corresponding account is discovered, he corrects the entry by cancelling the suspense account with the correct account.

 

Suspense account might have many items, so for each error, there is a method you can apply:

First, think what is the correct entry?

Second, find out what entry has been made (if any)?

Third, what entry has to be made to correct the error?

If one side of the double entry is made before, then the other entry goes into the suspense account (if the above entry is credit, then the entry in the suspense account will be debit).

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