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June 14, 2019

Types of Accounting Errors and How to Correct Them?

June 14, 2019


A correcting entry is a general entry which is made to remove the effect of incorrect entry previously made.  A trial balance is prepared to identify accounting errors. However, there are some errors which is not revealed by the trial balance. An accounting error which makes the trial balance unequal is easier to identify. But those errors are difficult to identity that make the balance of trial balance equal. Given below are some of the types of errors with examples and corrections.


1. Error of Omission


The error of omission is occurred when a transaction is not recorded. For example, a payment of Rs. 60000 received from a customer is omitted, so the correcting or recording entry would be as follow:


Correction-of-error


2. Error of Commission


Error of commission is putting a debit or credit entry into a wrong account. For instance, cash Rs. 40000 received from party A but wrongly credited the account of party B. So, the correcting entry would be as follow:


Correction-of-error


3. Error of Principle


Error of principle occurs when we do not follow the General Accepted Accounting Principles (GAAP). This type of error may be in the form of recording a transaction into a wrong account. For example, furniture is purchased for Rs. 30000 for business use.   But mistakenly, it was recorded in a sale account. So, the correcting entry would be:


Correction-of-error


4. Compensating Error


Compensating error offsets another accounting error. It is difficult to spot these errors. Since the net effect is zero, the statistical analysis may not find the compensating error. For instance, purchase account is overstated for Rs. 15000. While on the other hand, the sale account is also overstated for Rs. 15000. The balances of two columns (debit and credit) of the trial balance would be correct but the account balances would be incorrect. . So, the correcting entry would be as follow:


Correction-of-error


 5. Error of Original Entry


This type of error occurs when wrong amount is entered. For example, deposited cash Rs. 72000 to bank but the amount was wrongly entered Rs. 27000 by the accountant. So, the correcting entry would be:


Correction-of-error


6. Complete Reversal of Entries


Complete reversal error occurs when the amount is entered correct but the debit and credit is reversed. For example, cash sale is made for Rs. 60000 but wrongly sale is debited and cash is credited both with the same amount as shown below:


Correction-of-error


The correct entry will be:


Correction-of-error
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