Classification of Errors
1. Errors Detected by Trial Balance. 2. Errors not Detected by Trial Balance.
Errors those Detected by Trial Balance
i) Posting Error: This type of error occurs while posting the accounting data.
ii) Listing Error: While creating the trial balance making wrong ledger balance entries in the trial balance.
Errors not Detected by Trial Balance
i) Errors of Principle
ii) Errors of Omission
iii) Errors of Journalizing
iv) Compensating Errors
Error of Principals: This mistake is made due to lack of accounting knowledge – violating the basic principles, concepts and practices of accounting and making account entries.
i) Treating capital expenditure as revenue expenditure
Purchase of $10,000 of furniture and debit it to Inventory.
ii) Treating revenue expenditure as capital expenditure.
Debiting repair costs of $5,000 to fixed assets
Error of Omission: This type of error occurs when a transaction is happened but the entry is missing.
Error of Commission: If any wrong entry is posted while recording the account, it will be included in the Error of Commission.
Example: John is a debtor of XYZ LLC, $5,000 was collected from him and correctly debited as cash, but Smith was mistakenly credited instead of John.
Compensating Errors: When a mistake is corrected by another mistake and the balance is matched, – called compensating error. In this case, even if the balance matches, the error will remain.
Example: On February 5, 2xxx purchased $8,000 of goods from John and mistakenly credited it to Smith. On February 15, 2xxx purchased $8,000 of goods from Smith and was intentionally or mistakenly credited as John.
At first glance, this seems to be ok, but according to accounting principles, it is not.
Methods of Detection of Errors
Things need to check
i) Sum of the debit and credit balance of the trial balance.
ii) To check whether all the ledger balances have come up correctly in the trial balance.
iii) Whether the ledger balance is correct or not.
iv) Bank book and bank statement.
v) Whether Bank Reconciliation Statement has been prepared or not.
vi) Whether previous year balances have been brought forward in the current year or not.
vii) Debtors and Creditors accounts are correct or not.
viii) Balance of capital, drawdown, goodwill, opening stock etc. should be checked.
ix) Documents – which are the basis accounting database should be checked.
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