Learning Materials For Accounting, Management , Finance And Economics.

Saturday, July 3, 2010

Types Of Accounting Errors Based On Their Nature

The accounting errors based on their nature can be of the following types:

1. Clerical Errors
2. Errors Of Principe

1. Clerical Errors

The errors which are committed by accounting clerks are called clerical errors. These errors are committed in the process of recording financial transactions. These take place due to the carelessness of the clerk responsible for recording financial transactions. Clerical errors are also called technical errors. The principal types of clerical errors are as follows:

a) Errors Of Omission

The errors committed by not recording a transaction either in the book of original entry or in the ledger book are errors of omission. Such an omission may be either complete or partial.

Complete Omission
Complete omission takes place if a transaction is not recorded in the journal at all. for example, goods sold to John for $ 10,000 were not recorded in the sales book at all. A complete omission of transaction may occur due to many reasons such as sales invoice misplaced or lost.

Partial Omission
Partial omission occurs if a financial transaction is recorded only partially. For example, partial error of omission occurs if goods sold to John for $ 4000 is recorded in sales book but failed to be posted in John's account.

b) Errors Of Commission

The errors which are committed while recording or posting a transaction are called errors of commission. Errors of commission may take place either in the journal or in the subsidiary books, or in the ledger. Such errors include posting wrong amounts, posting on wrong side of accounts, wrong totaling or carrying forward, and wrong balancing. For example, if purchase of goods for $ 10,000 is entered as $ 1000 in the journal or in the ledger, such error is called errors of commission.

c) Compensating Errors

Compensating errors refer to two or more errors which mutually compensate the effects of one another. If one error balances the effect of another error, then the two error are called compensating errors. For example, goods sold for $ 5000, but wrongly posted to the customer's account as $ 500. Similarly, goods purchased for $ 5000, but by chance, wrongly posted to the supplier's account as $ 500 . The errors in the personal account are compensated by each other, as $ 4500 short on the debit side of the customer's account and on the credit side of the supplier's account.

d) Errors Of Duplication

Errors of duplication are those errors which arise because of double recording. Double posting of a transaction from journal or subsidiary books to ledger also create such errors. For example, goods sold to John, but this transaction is wrongly entered twice or more in the sales book or wrongly posted twice or more in John's account then it is called the errors of duplication.

2. Errors Of Principle

Errors of principle are those errors which occur by violating the principles of accounting. Errors of principle may occur due to wrong allocation between capital and revenue expenditure, or wrong valuation of assets. For example, debiting the wage account instead of machinery account for the wage paid to the mechanics used for the installation of machine and debiting the customer's account instead of cash account for the cash sales made. Errors of principle may also occur due to wrong valuation of assets by higher level staff.