Accounting errors is a notion used in financial reporting in order to describe a non-fraudulent discrepancy in the financial documents of a company.
Types of accounting errors
There may be different types of errors:
- Error of omission: a financial transaction that does not appear in the documentation or is not recorded by mistake, failing to record the item altogether.
- Error of commission: a recording of a transaction for the wrong value in the correct account, such as subtracting a sum that should have been added.
- Error of principle: a financial transaction that does not meet the international requirements and generally accepted accounting principles (GAAP). It appears as an accounting mistake in which a figure is recorded in the incorrect account, thus violating the fundamental principles of accounting. It is a procedural error which consists of the correct value of the entry, but placed incorrectly. These types of errors are also called input errors.
- Transposition errors occur when two or more digits that are reversed (or transposed) individually or as part of a larger sequence. It appears as an error in data entry when posting a new recording. Although it is usually small and unintentional, it can result in further miscalculations which can lead to significant financial losses, as well as time invested in order to identify the problem.
- A “rounding error” is a mathematical miscalculation resulted by the modification of a number to an integer or one with fewer decimals. Although usually it is inconsequential, it may appear in some cases in the current computerized financial environment resulting in a spiral cumulative effect, needing further resources in order to rectify it.
- Reversal of Entries – it may happen as accounting entries are completely reversed, thus the entries are debited to one account and credited to the other.
Thus, by the consequences an error may have, they are:
- Simple errors in recording that do not impact the more general financial figures;
- Errors which may result in further miscalculations and would involve further scrutiny in order to repair the damage.
By the intention of the person creating the issue, the errors may be:
- Non-intentional, as most input errors. In these cases, a more automatic system of checks and balances is suggested in order to minimize the risk of such mistakes occurring in the future.
- Intentional: a more delicate matter, these could lead to criminal investigation and possible charges such as dilapidation or money laundering, therefore the intention needs to be thoroughly and objectively assessed.
If a company discovers that an accounting error has been made and would have an important financial consequence, it would involve resource to rectify the financial recordings as well as issue a statement owning the fault and releasing the correct entries.