4 Common Accounting Errors and How to Prevent Them (2024)

Mistakes happen — even in buttoned-up accounting departments. Despite everyone'sbest efforts, errors can (and do) make their way into accounting processes and cause allsorts of havoc. A transposed digit can throw debits and credits noticeably out of balance,or a reversed entry can cause an imperceptible error to casual readers. That's whyit's important to have a plan in place to detect, minimize and fix mistakes. Errorprevention may be a loftier, even impractical, objective given the human element involved,though the right accounting software controls can help.

Here's what you need to know to reduce the number of errors that can creep intoaccounting systems.

What Is an Accounting Error?

Let's start with what's not an accounting error: fraud. Fraud is the purposefulmanipulation of accounting information. It's illegal and unethical, but it's notan "error."

Accounting errors are unintended accidents; they are the result of an inadvertent mistake.Sometimes accounting errors are caused by a slip of the hand, like transposing a number orhitting an incorrect key. Other times they stem from a misunderstanding of accounting rulesor company policy. Nevertheless, any accounting department worth its salt aims to limiterrors in its accounting data, especially data that flows into financial reporting used byinternal and external stakeholders. Errors can be embarrassing at best, misleading at worst.

Key Takeaways

• Accounting errors are unavoidable but can be minimized.
• Common accounting errors arise from faulty data entry, omission errors, commissionerrors and errors in principle.
• Accounting errors undermine company credibility, waste resources and hamper thereliability of information needed for business decision-making.
• Combining preventive and detective controls with accounting software can reduce thelikelihood of errors.

Types of Accounting Errors

There are two broad categories of accounting errors — those that affect the trialbalance and are easily detected and those that don't obviously throw off the balance,requiring a closer look. The trial balance is an accounting report, run during the financialclose process, that shows the ending debit or credit balance for every account in acompany's general ledger. The trial balance should show the sum of debit and creditbalances in equal amounts, though not necessarily individual debit and credit balances.

• Errors that cause the trial balance to clearly be out of balance. Forexample, recording an unbalanced journal entry or a single-entry journal entry can causethe overall trial balance to be incorrect. These basic errors are typically caught byaccounting software controls that prevent transactions with unequal debits and creditsfrom being recorded in the first place.
• Errors that do not have an obvious impact on a trial balance can stillcause problems. For example, a transaction might be recorded twice or entered inincorrect general ledger accounts, yet be undetectable in a trial balance because thedebits and credits will still appear equal. In fact, most accounting errors do not causethe trial balance to be unbalanced and therefore must be identified using other controlmechanisms.

How Do Accounting Errors Impact Businesses?

Accounting is the language of business, andaccounting errors create miscommunication. If the underlying accounting data is incorrect,the stakeholders who rely on it are more likely to make a misinformed decision. For example,an accounting error can cause a business manager to make a suboptimal operating decision,especially harmful in cases where profit margins are thin or cash flow is tight. Similarly,external lenders might be relying on inaccurate financial statements when making lendingdecisions.

Accounting errors can lead to strained relationships with suppliers and customers iftransactions are handled incorrectly or missed entirely. They can also undermine businesscredibility. Additionally, accounting errors take time to correct, making staff lessefficient, and can cause labor costs to increase.

Further, accounting errors can causeproblems with compliance reporting, such as financial statements, debt covenants and taxfilings, which, in turn, can trigger audits, penalties and fines.

For these reasons, it's important to reduce the occurrence of errors and increase theability to detect them when they arise. Errors should be fixed as soon as they arediscovered to mitigate a snowballing negative impact on the business.

4 Common Accounting Errors

Accounting errors that are evident on a trial balance are easy to identify and fix as part ofthe accounting close. But for the majority of accounting errors — those that areundetectable at the trial balance level — more effort is required. For this reason,it's important to put processes in place to detect these four common accounting errors:

1. Data entry errors. These are basic accounting mistakes. Data entryerrors include transposed numbers, typos and other (often manual) slipups, like amisplaced decimal.
2. Errors of commission. This category of errors arises from an incorrectaction — for example, a transaction is recorded but some part of it is wrong, suchasusing an incorrect general ledger account number or using a miscalculated or improperlyrounded value. Reversed entries, where debits and credits are improperly switched, andduplicated entries are also errors of commission.
3. Errors of omission. These errors happen when a transaction isoverlooked and not recorded. It's simply left out of the accounting records.
4. Errors of principle. Errors of principle occur when the wrongaccounting treatment is applied to a transaction. Errors of principle are significanttechnical accounting errors, as the resultant transaction will not be in accordance withGenerally Accepted Accounting Principles (GAAP), either because the wrong guidance wasfollowed or because it was followed incorrectly.

It's especially tricky to find accounting errors that compensate for each other.Sometimes these errors manage to unintentionally offset each other, masking the underlyingmistake. For example, lease expenses for two identical company cars can be duplicated in onedepartment and omitted in another, making totals appear accurate even though individualdepartmental costs (and associated key performance indicators) are incorrect.

6 Ways to Prevent Accounting Errors

As the saying goes, an ounce of prevention is worth a pound of cure. When it comes toaccounting, the most effective accounting departments have control procedures in place thataim to do both. There are two types of controls: Preventive controls are designed to blockerrors from occurring to keep financial data clean before it flows into financial reportingthat goes to stakeholders. Detective controls identify errors or irregularities forinvestigation and correction after they are recorded. It's important that the curativedetective controls be performed regularly so that accounting errors are caught quickly.

Following are examples of preventive and detective controls that serve to minimize accountingerrors.

Preventive Controls

1. Use accounting software that includes error-reducing features, such asthe ability to block lopsided transactions that would impact the trial balance. Choose aproduct with the highest level of automation and systems integration; this will minimizethe need for excessive manual intervention, which is how many data entry errors areintroduced. NetSuite CloudAccounting Software includes tools that consistently apply specified standardsand policies to limit errors of commission and errors of principle.
2. Invest in staff by training them properly, providing adequate resourcesand ensuring manageable workloads. Overstretched accounting departments are more likelyto generate accounting errors.
3. Segregate duties and provide adequate review to help minimize errors.These controls go hand-in-hand. By having a separate set of eyes review anotherperson's work product, errors can often be flagged at the front end of theaccounting process. Since this can be challenging for companies with a small staff orwhere the owner does it all, consider using an outside accountant to review accountsperiodically.
4. Stay organized with proper record-keeping to reduce the likelihood ofoverlooking accounting transactions that produce errors of omission. Properly organizedrecords are also required in the event of a tax audit.

Detective Controls

5. Perform timely account reconciliations to compare accountingbalances with external sources, such as bank statements, loan statements and credit cardstatements. Reconciliations can also apply to comparisons of subsidiary journals (thatis, special chronological records of frequently occurring transactions, such as anaccounts receivable subsidiary journal) to the general ledger, although this step canusually be eliminated by using integratedaccounting software.
6. Compare actual balances to budgeted balances to highlightvariances. By analyzing variances that seem unreasonable, accounting errors can bediscovered. For example, duplicated entries might create larger-than-expected balances,while omitted transactions may result in smaller account balances than might make sense.A similar procedure can be performed using actual balances from the current year versusthe prior year or with regard to key performance indicators.

Conclusion

Accurate accounting information is critical for business management. While there is noironclad way to eliminate all accounting errors, processes and controls can be put intoplace to help minimize their occurrence. Understanding how common accounting errors ariseand where to look for them are important first steps. Using automated integratedsoftware, together with an assortment of preventive and detective controls, cancreate a less error-prone accounting environment.

Accounting Errors FAQs

What are common accounting errors?

Accounting errors are unintentional mistakes that can originate in a number of ways.Commonly, they involve recording a transaction incorrectly because of a data-entry mishap.Sometimes transactions are missed entirely or are simply recorded in the wrong subsidiaryjournal. Less often, but more important, accounting errors may be the result of using thewrong accounting standard or misapplying that standard.

How do you identify accounting errors?

A strong framework of preventive and detective controls, together with suitable accountingsoftware, can be the most effective way to find accounting errors.

What are the various types of errors in accounting? Explain with examples.

Accounting errors are broadly described as those that either cause a clear imbalance in thesum totals of debit and credit balances and errors that don't. The most obvious errorsimpact the trial balance, causing debits to be out of balance with credits. Errors thatdon't impact the trial balance can be more difficult to detect. They include data entryerrors, such as typos; errors of commission, such as using the wrong general ledger accountnumber; errors of omission, such as neglecting to record a transaction; and errors inprinciple, such as recording a purchase as an expense rather than an asset.

What are the 4 types of accounting errors?

Most accounting errors can be classified as data entry errors, errors of commission, errorsof omission and errors in principle. Of the four, errors in principle are the most technicaltype of error and can cause the resultant financial data to be noncompliant with GenerallyAccepted Accounting Principles (GAAP).