If you are a small business owner or have just embarked on your journey, you know mistakes are bound to happen. Everything is fairly new, especially with the financial and accounting system. There is a lot of data collection, management, and analysis happening on a regular basis, making a hundred percent accuracy of the tasks hard to achieve.
The best solution here is hiring an accounting firm as they are more qualified and experienced. But if you are someone who wishes to keep accounting solutions internal, you have to be extra cautious in order to prevent mistakes and identify and resolve them if they occur. Without that, your business can get negatively impacted.
Read below to gain an understanding of the common types of accounting errors and ways to keep them at bay –
- Error of Omission
The majority of times, transactions slip through the records, resulting in inaccurate assessments. And that is not necessarily intentional; it just gets overlooked. You may forget to enter expenses or omit sales transactions and adjust inventories.
Since these mistakes are hard to catch, you better develop a habit of timely bookkeeping and establishing clear practices for others. Also, use bookkeeping or accounting software to make daily recording easier and error-free.
- Error of Commission
This is another error that occurs during hasty clerical entries. The bookkeeper records a debit or credit to the correct account, but to the wrong subsidiary account or ledger, i.e., you receive payment from the client and credit to the accounts receivable account, but the wrong customer.
When you identify this error, rectify it by debiting/crediting the account that should have been debited/credited and crediting the account that has been erroneously debited/credited.
- Error of Principle
Such an error arises when an entry does not comply with Generally Accepted Accounting Principles (GAAP) and is recorded in the wrong account. Consider the example where you purchase some machinery and post it as an operating expense instead of a fixed asset purchase. Your income statement and balance sheet can be flawed due to this and pose severe consequences for your business.
The only solution is to check your balance sheet. If no loophole is detected, go over your accounts, trial balance, and other statements repeatedly. Try to take expert help here.
- Data Entry Error
Such errors happen when transactions are not recorded properly. Sometimes, data entry is done in the wrong account or made twice (duplicate entry). Transposition and typographical errors also come under this category where numbers are reversed or entered wrong.
These mistakes are often caught during bank reconciliation. So, reconcile your statements more frequently.
- Compensating Error
It is an error where two wrong transactions occur at the same time and offsets the other. For instance, you overstate your income by $500 and your expense with the same amount, you even out both as entries are wrong.
Though your trial balance won’t be in any sort of trouble due to this, you better let a specialist scrutinize the statements and correct them.