Type of Common Accounting Errors
A trial balance is a listing of all account balances from the accounting ledgers of a particular date, to see whether the total debit balance amounts to the total credit balance. The concept of double entry makes sure that two totals, such as credit balances and debit balances at any specific date must match. If the sums are not equivalent, there should be some mistake or error in the bookkeeping.
To prepare a trial balance, the ledger accounts must be balanced, as well as the cash book. Then, the balances with the credit balances and debit balances are listed in different columns. The total of the credit balances must equate to the sum of the debit balances (Also see An overview of Double Entry Accounting). The trial balance agrees if the total is equivalent.
Restriction Of A Trial Balance
As mentioned above, there would be an error in the bookkeeping if the total credit and debit balances (Also see Understanding credit and debit in the business) do not match. However, it does not indicate that there are no mistakes, even the trial balance agrees (Also see 5 benefits of proper accounting). The followings are six types of errors that do not impact the trial balance.
Errors Of Omission
Omission error happens when an accounting entry is neglected in the books of accounts. Due to the fact that neither credit nor debit balance is inputted for the transaction, the omission would not impact the trial balance, although it can sometimes be tracked when bank reconciliation is performed, if it a bank-related transaction.
Errors Of Commission
Mistakes in commission occur when an accounting transaction is inputted in the incorrect account head yet in the same class as the correct account head. For instance, the payment of the telephone bill is entered wrongly to electricity account. However, both telephone and electricity accounts are categorised under expense accounts.
Errors Of Principle
When a transaction is entered wrongly into an account head that is in a different category with the correct account, the error of principle occurs. For example, payment for petrol of a vehicle should be inputted in Motor Vehicle Running Expenses account which is under expense account, but it is inputted wrongly in Motor Vehicles account which is a fixed asset account.
Errors Of Original Entry
Original entry error occurs when a wrong amount of a transaction is entered in the book of prime entry. To illustrate, a sale invoice for RM350 is inputted in the sales journal as RM35.
Reverse Posting Of Transactions
This error happens when an account which needs to be debited is wrongly posted as credit entry, and the account which needs to be credited is debited. For example, a payment obtained from a debtor is debited again to debtor’s account (it should be credited) and credited to the bank account (it should be debited).
Under compensating errors, two or more than two mistakes cancel each other out and therefore are hard to trace. For instance, an invoice of RM1,200 in the sales journal is entered into the customer’s account at RM1,000. Simultaneously, the total of sales journal is reduced by RM200. Therefore, the credit balance of the sales account and the debit balance on the client’s account would be understated by RM200.
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