8 Accounting Errors and How Businesses Can Solve Them?

Accounting System gives vital insights to businesses for the preparation of tax returns and compliance with government regulations. A key factor for understanding business operations and the mistakes in it, even whether businesses use a cloud-based or desktop accounting system. Errors in the accounting operations will lead to impacts on the efficiency of core business stages. Thus its is critical for businesses to be well informed of the same and how to solve them without affecting other departments. This article is aimed at acknowledging the most common types of accounting errors, how they occur, and effective measures in solving them. Maintaining integrity throughout the accounting system is possible only with transparency in data entering with the inclusion of appropriate accounting, application of description or coding for items, and entering the appropriate amount. With misunderstanding of accounting rules and simple mistakes accounting errors can cause quite a hassle. OURS GLOBAL’s Finance and Accounting Outsourcing Services helps businesses to focus on business growth rather than back-office accounting operations with integrated, flexible & affordable leveraging industry-leading technology and well-qualified and experienced accounting professionals cornering all accounting errors and end-to-end reviewing of accounting reports.

Following are the Eight Accounting Errors

1.Data Entry Errors

All mistakes that are committed when items are entered into accounting systems such as entering items into wrong accounts, transposing numbers, elimination/addition of digits or decimal places, omission/duplication of entries or misleads of taking expenses as incomes, or vice-versa. Taking up as a low priority for organizations, many treat data entry as a low valued skill even though it is a critical process. The majority of errors come from inefficient manual data entry creating a major impact on the bottom line. Implementation of repeatable processes and data validations proves to be important for maximum ROI and improved data entry.    

The common data entry errors being manual data entry mistakes and incorrect data, the sources of such errors can be external or internal, driving to cascading effects.

Manual Data Entry Errors

Usually internal and made by inhouse professionals, manual data entry errors are of two types: 

  • Transcription Errors- Typos, repetition, and deletion while entering 

and autocorrection features in word processors. 

  • Transposition Errors- Most common while entering numerical data 

without any order, easy to happen, and tougher to identify.

Incorrect Data

Errors from the data source, with exterior participants such as customers or data suppliers while data handling and entering. Hardest to deal with and requires revisioning at the source, incorrect data causes much damage by quick-spreading throughout the organization hindering the working of multiple departments. The departmental team will end up working over incorrect data even before detection.

2.Error of Omission

Simply failing in recording items, without any intention causes problems in accounting systems. Errors caused with misplacement of documentation of receipt or invoice that never gets recorded also comes under this category. The error of omission or false negatives usually happens during instances where someone or something is excluded to consider, whenever they or it must be included. Typical occurrence of such errors while considering the determination of a unit.

Mainly two types of errors of omission are as follows:

Partial Omission: Failing to post already recorded transactions in the books to the ledger. Such errors also occur among subsidiary books.  

Complete Omission: Complete omission of transactions from recording into the books, these are contrary to the partial omission and may not be recorded in the cash book. 

These omissions will leave no debit or credit entry in the ledger. 

3.Error of Commission

Mishandling of accounting data, incorrect entering of the same or even putting in the appropriate general account or using the incorrect sub-account leads to the error of commission. The total payments only come outright only if there are appropriate accounting operations. Any errors in each transaction will disorient the accounting purposes. Such errors constitute the following disparities in the recording of the wrong amount in subsidiary books, wrong totaling of subsidiary books, posting incorrect amount in ledger accounts, incorrect totaling of ledger balances, and posting on the wrong side of ledger accounts.

4.Error of Transposition

Recording of incorrect item value by reversal of numbers can cause overstating or acknowledgment of the amount of an item resulting in transposing a number. Such errors can be costly if the deductible amount can’t be claimed with the entry error. Creating imbalance among credits and debts difference, transposition errors can easily be identified by appropriate extraction of trial balance. Identification of errors is quite hard and can easily be spotted between the debit and credit entries while balancing the trial balance. 

5.Compensating Error

Generally occurring when two errors occur at the same time with one offsetting the other, making zero net effect. Such errors are difficult to identify when they occur within the same account and in the same reporting period making a null net effect. These types of errors are not possible to spot with statistical analysis. Such kind errors are also common in different accounts affecting the trial balance totals making incorrect debits & credits and account balances. 

6.Error of Duplication

The use of separate and specialty software programs always makes room for redundant or duplicate data entry repeatedly into accounting, inventory, project management, customer relationship management, and business software programs. Entering the same item of income or expense more than once will cause a drop in productivity levels and maximizes the risk for data error in each area. Ordering the wrong quantity of products or sending invoices to the wrong address will incur costly mistakes, with bad data seeping into the financial analysis. Making financial business health to be much more solid, is critical while taking decisions over the expansion of operations, initiating investment in newer people or assets, or accepting newer projects.  

7.Error of Principle

Not being compliant with Generally Accepted Accounting principles, causing problems while recording items. These usually occur with the error of entering to wrong accounts or places. With errors of principle making critical procedural errors can make major consequences.  

8.Error of Entry Reversal

Entry reversal is the accounting entries posted in the wrong direction inferring the recording of debits as credits or vise versa. That is, this is a result of treating an expense as an item of income or vice versa. 

Following are the Accounting Errors That Can Affect a Business:

  • Incorrect Income Reporting: 

Any miscalculation of distorting operations over profit margins or resultants in income over-reporting of income.

  • Incorrect Cash flow information

Incorrect reporting of items will overstate or understand the amount of cash on hand for payment of bills.

  • Incorrect Expense Reporting

Inability to the inclusion of business expenses for reporting deductible expenses leading to overpayment of taxes.

  • Increased Labor Costs

Time consumption and labor intensiveness for back-end classification mistakes 

  • Late Payment Fees

Late discovery of miscalculation errors in the accounting cycle makes past due and resultants in interest and additional fees.

  • Improper Income and Expense Classification

Incorrect reporting from misclassified expenses will later require accrual accounting. Improper matching of expenses with generated income will lead to the classification of expenses to the wrong month or year.

  • Fraudulence 

Employees making fraudulence can occur in any business. Unmatched items will lead to an indication of the same and open room for investigation.

How Businesses can Solve These Accounting Errors?

Financial information forms as the first line of defense for any business and proper classification and correct entry is critical for eliminating all kinds of errors.

Following are the Steps for the Facilitation of Sound Accounting Entries: 

1.Proper Training of Staff Over Data Entry Accuracy

Employees who enter expenses into the accounting system must have a strong understanding of accounts and descriptions. Ample employee training can help businesses to take complete advantage of this option. Devising company policies over documentation procedures will ensure accuracy throughout the business operations. 

2.Don’t Overload Employees

Overloading of professionals with work leads to simple entry errors. Giving adequate time for handling this activity to employees will make current accounting. Opting for simplification and improvement of data entry operations will avoid errors. The use of ideal expense report software will also ensure easy importing of data into the accounting system. 

3.Utilization of Innovative Accounting Software

Use the latest version of your accounting system. Software and cloud versions are continually being improved to simplify the entire accounting process. Cloud-based systems update automatically, desktop software requires a purchase every several years to stay up to date.

4.Implementation of Internal Controls

Incorporating appropriate practices will lead to the detection and correction of accounting errors. Time to time reconciliations can prevent issues and linger on the books, avoiding incorrect entries.

5.Checks for Differences Between Budget and Actual expenses

Incorporating accounting expenses will keep businesses on the right track, making a budget allocating a certain amount of money for a particular item or activity, without matching up. Comparison of actual expenses to the budgeted amount will help in the discovery of misclassification. 

6.Periodic Professional Account Reviewing

Periodic reviewing of accounts will appropriately reflect the expenses incurred and compliance with GAAP. Making use of features in accounting software will facilitate client data reviewing.  

7.Adopt Best Accounting Practices and Standards

Setting deadlines for data entry and reconciliation will quicker identification and correction of errors. These can be incorporated into accounting systems for dictating incomes and expenses later reporting it.  

Accounting errors can be fixed by simply changing an entry, by making the appropriate entry. Corrections in expense classification will lead to changes in accounting approaches for tax purposes, demanding to file a request for changes in accounting methods. All the accounting errors that are stated above can easily be solved with accounting best practices that can easily solve them. Avoiding miscalculations entirely is only possible if businesses outsource their accounting requirements to ideal service providers such as OURS GLOBAL’s Finance and Accounting Services.  Contact us to ensuring hassle-free accounting and correct numbers.

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