10 Common Accounting Errors

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10 Common Accounting Errors

Table Contents

10 common types of errors in accounting. 3

Finding and eliminating accounting errors. 4

How to prevent accounting errors. 4

  1. Data entry errors. 4

Potential impact 5

Error signs. 5

Solutions. 5

  1. Omission errors. 5

Potential impact 5

Error signs. 5

Solutions. 6

  1. Duplication errors. 6

Potential impact 6

Error signs. 6

Solutions. 6

  1. Transposition errors. 7

Potential impact 7

Error signs. 7

Solutions. 7

  1. Compensation errors. 8

Potential impact 8

Error signs. 8

Solutions. 8

  1. Principle errors. 8

Potential impact 8

Error signs. 9

Solutions. 9

  1. Entry Reversal error. 9

Potential impact 9

Error signs. 9

Solutions. 9

  1. Closing error. 10

Potential impact 10

Error signs. 10

Solutions. 10

  1. Reconciliation error. 10

Potential impact 11

Error signs. 11

Solutions. 11

  1. Misuse of accounting software. 11

Potential impact 11

Error signs. 11

Solutions to accounting errors. 12

 

 

 

 

 

 

BOOKKEEPING

10 common types of errors in accounting

By QuickBooks

January 5, 2022

Accounting errors can throw a major wrench in your plans if they go unnoticed. How can accounting errors affect your business? A few ways might include incorrect statements that lead to further complications, bills or payroll going unpaid, or portraying a false picture of your financial health. These errors can be costly and can cause significant damage to a company of any size.

Our guide will help map out common accounting errors including the signs to look out for, how to prevent them, and what impact they may have on your business. If you have a specific error in mind, you can jump to its section using the menu below:

  1. Data entry error
  2. Omission error
  3. Duplication error
  4. Transposition error
  5. Compensation error
  6. Principle error
  7. Entry reversal error
  8. Closing error
  9. Reconciliation error
  10. Misuse of accounting software

Finding and eliminating accounting errors

When finding and eliminating accounting errors, the sooner the better. Double-checking your work may not be the fastest way to find an accounting error, but it certainly is the best way to catch it in action. Take the time to check your work to locate any potential errors that might’ve occurred. Also, try:

  • Comparing to previous reports to locate discrepancies
  • Using Excel or Google Sheets for mathematical acceleration and numerical checks
  • Asking a colleague or supervisor to look over your work
  • Comparing your accounting records to bank statements
  • Checking your trial balance for any discrepancies
  • Working with a bookkeeper to clean up your books and identify errors

How to prevent accounting errors

Preventing accounting errors before they happen can save you time and keep your book clean. There are a few methods you can use to help reduce and prevent errors before they happen::

  • Using an accounting software program like QuickBooks to automate the process
  • Double-checking all entries to prevent accounting errors in your books
  • Going for accuracy instead of speed; don't rush the process
  • Setting a password on your books after you close to prevent additional entries from posting
  • Working with a professional bookkeeper to help you maintain your books, and consulting with an accountant when changes happen in your business that have significant accounting implications

We’ll explore these solutions and more as they pertain to each error in the sections below.

  1. Data entry errors

Data entry accounting errors occur when inaccurate data or information is entered in your books. The integrity of your data is vital to have the correct information in your accounting system. Data entry mistakes could include:

  • Entering an incorrect number
  • Entering the correct number in the wrong order
  • Entering numbers instead of words or vice versa

Potential impact

The potential impact of a data entry error can vary from something minor like a spelling error to a major mishap such as underpayment or overpayment of a vendor.

Error signs

Data entry errors are common but can compound to create problems down the line. Finding signs of an error can happen in several ways:

  • The trial balance is off
  • Reconciliation is off
  • Records don't match bank statements

Solutions

You can solve and prevent data entry errors in a number of ways:

  • Double-checking entries
  • Using accounting software to automate the process and reduce the amount of data that needs to be entered manually
  • Don’t overload; aim for accuracy, not speed

 

  1. Omission errors

An omission error (or a false negative) is simply the problem of forgetting an entry like a purchase or sale.

Potential impact

One of the problems with forgetting to enter data goes back to data integrity. That entry could've been an employee's salary or a budgeting item used to make an important financial decision.

Error signs

Noticing something is missing from your books is never fun, but finding the error quickly is what’s important. To locate errors, go through this checklist:

  • Identify accounting records don’t match bank statements
  • Look for discrepancies in the trial balance
  • Find mismatched checks and balances

Solutions

The same data entry error solutions also apply to omission errors, including:

  • Double-checking entries
  • Using accounting software to automate the process
  • Don’t overload; aim for accuracy, not speed

 

  1. Duplication errors

Too much of anything can be a bad thing, including data. Duplications are another common accounting error that is the result of double-entering an income or expense entry.

Potential impact

Duplication errors can have a substantial impact on your accounting system or any outcome. A couple of examples include:

  • An accountant double-entering COGS
  • Extra credit or debit on a purchase order
  • A bookkeeper duplicating a paycheck

Error signs

Duplication errors are arguably one of the most common and easily spotted errors in accounting. A few signs to look out for are:

  • Showing more than usual on the books
  • Checks and balances don’t match up
  • Bank statements don’t match your records

Solutions

Solving accounting problems are usually summed down into three separate solutions:

  • Double-checking entries
  • Using accounting software to automate the process
  • Don’t overload; aim for accuracy, not speed

 

  1. Transposition errors

Transposition errors are a result of reversing two digits that were entered back-to-back. Serious financial consequences can result from a transposition error, such as paying an employee $8,268 instead of $2,868

Potential impact

The potential impact of transposition errors can vary from an overpayment, as we saw in the example above, to something as small as ordering an additional unit of paper clips. Either way, the result could mean a loss of funds for your business.

Error signs

Transposition errors can be a bit more tricky to catch, but the error signs could look very similar to that of any other accounting error:

  • Showing more than usual on the books
  • Checks and balances don’t match up
  • Bank statements don’t match your records

Solutions

Finding the solution can also look very similar to that of any other accounting error:

  • Double-checking entries
  • Using accounting software to automate the process
  • Don’t overload; aim for accuracy, not speed

 

  1. Compensation errors

A main part of the accounting process is payroll, and paying your employees correctly needs to be a priority. Compensation errors, while uncommon with automated tools like QuickBooks, do happen.

Potential impact

It goes without saying that over or under-compensation doesn’t look good on the books, but it’s also not good for rapport within your organization. Employees want to trust they will be paid correctly and on time from your company. Too many incidents like this may create distrust in your accounting system. In fact, a survey by QuickBooks showed that 1 in 6 small business employees said a single inaccurate paycheck would make them quit their job.

Error signs

Someone going unpaid will probably result in an angry employee phone call, but finding the error before payroll gets completed should be your main goal. Comparing the current payroll to the last pay period for any large swings up or down should be your first move, especially if your employees have consistent schedules week over week.

Solutions

Luckily, compensation errors are generally a quick fix if caught soon enough, but can pose a problem if they’re not caught at all or left unattended. To prevent these errors, go through the same steps as with data entry errors:

  • Double-checking entries
  • Using accounting software to automate the process
  • Don’t overload; aim for accuracy, not speed

 

  1. Principle errors

Another accounting error is a principle error, where an accounting entry violates a fundamental accounting principle.

Potential impact

An example of a principle error might be buying a piece of equipment and miscategorizing the expense as a sale instead of a purchase. Such a snafu could wreak havoc on your checks and balances when it comes time to reconcile your financial statements.

Error signs

The error of principle can take some investigation to discover, but it can often be found right before the release of the final financial statements for the quarter. This could also take many forms, such as mismatching debits and credits or errors when transferring sums from the income statement to the cash flow statement.

Solutions

Solutions to errors of the principle include:

  • Having checks and balances in place prior
  • Correcting categorizations
  • Checking the final accounting report for discrepancies
  • Working with a bookkeeper who is familiar with accounting principles and how to properly record transactions

 

  1. Entry Reversal error

Entry reversal resembles that of a principle error and can easily be confused for one, however, entry reversal is the result of entering data in the wrong direction. So either a credit was debited or debit was credited incorrectly.

Potential impact

Entry reversal has the potential to turn your checks and balances upside down. For instance, say you record a debit as a credit. When it comes time to balance the books, you will be showing an additional amount that doesn’t exist.

Error signs

Signs of entry reversals can include showing additional income or additional expenses outside of the usual credits and debits balancing act that takes place. This happens because an entry was wrongfully categorized as either a credit or debit.

Solutions

To solve this problem, go back to your basic solution steps:

  • Double-checking entries and categories
  • Using accounting software to automate the process
  • Don’t overload; aim for accuracy, not speed

 

  1. Closing error

A closing error occurs when... Depending on your company, accounting close dates can vary, but the meaning of closing the books remains the same: All data has been entered and accounts are reconciled.

Potential impact

Making any changes to this data after the close date could result in major problems for future closing and your financial statements. For example, posting a new transaction on your books after the closing date requires you to repeat the closing process again.

Error signs

If you find a transaction is posted after the closing date, it’s likely you have a closing error on your hands. Closing errors could also be something as simple as making changes to your information after closing—either way, it now means a new close has to be processed.

Solutions

The easiest way to prevent any changes after close and avoid closing errors is to set a closing password. Most accounting software allows for this. This way, only one person has the power to go in and make any changes after the close.

  1. Reconciliation error

Reconciliation errors are errors that occur during the process of making all the accounts or books consistent or congruent. Reconciliation is another important aspect of the accounting process. It allows you to validate all the information on your books, sort of like a double-check before closing.

Potential impact

Reconciliation errors can come in multiple forms: either not reconciling at all or not reconciling all accounts. Either way, not reconciling correctly is asking for potential errors to come up down the road.

Error signs

It’s easy to tell when books have not been reconciled properly, namely because the checks and balances do not add up. Again, this either means there was no reconciliation or it wasn’t performed properly.

Solutions

The solution is simple: reconcile. Go in and perform the reconciliation process once more, making sure you’re checking all accounts in the process.

However, software like QuickBooks has made it much easier for business owners to keep track of their entries, making reconciliation much more painless. Since QuickBooks automatically matches credits and debits between your books and the bank, reconciliation is just an opportunity to triple-check your work.

  1. Misuse of accounting software

While accounting service like QuickBooks Live does have many helpful tools like live accountants and streamlined data entry, any system that is not used properly can cause an upset on your financial records.

Potential impact

With tools like automatically syncing your bank feed in QuickBooks, it’s easy to become complacent and feel the need to eliminate double-checking your bank statements. However, you may find that the bank has made errors of their own that transfer into QuickBooks and create a compounding error effect.

Error signs

If you have information coming in that’s off, being miscategorized, or just all-around wonky, there’s a good chance there’s been a misuse of accounting software.

Solutions to accounting errors

When utilizing any accounting system, it’s important that you train your employees on how to use it properly and take advantage of the advanced features it has to offer.

There are many ways to prevent and spot accounting errors before they can slow you up. The main point to remember when looking for accounting errors is maintaining the essential bookkeeping principles.

This, along with double-checking your work, can make all the difference between correcting your mistakes and letting them fall through. You can also take some of the pressure off with services like QuickBooks Live — receive professional help to catch these errors for you so you can focus on your other small business needs.

 

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