Committing errors is Human nature. Every entity wants to ascertain the financial position of its business at the end of the financial year. However, even after applying various procedures and checks there are certain errors committed to recording the transactions. Such errors may adversely affect the final accounts. It is very important for the accountants to locate such errors and rectify them and ascertain the true financial position of an entity at the end of the respected financial year. There are errors types like errors of Principle, errors of Omission, an error of Commission, etc
Bookkeepers and accountants commit mistakes like an omission, commission, etc in maintaining the books of accounts of an entity.
There are various stages at which errors may occur. Therefore, it is very important to the accountants and bookkeepers to identify such errors and rectify them.
Stages of errors
- At the Stage of Recording the Transactions in subsidiary books
- At the stage of posting the entries in ledger like a partial or complete omission, wrong totaling of accounts or posting on the wrong side etc.
- The stage of balancing the ledger accounts like wrong totaling of accounts or wrong balancing of accounts.
- At the stage of preparing the trial balance like taking the wrong account, taking the wrong amount etc.
Learn more about Rectification of Errors here in detail.
Types of errors
There are following types of errors
- Errors of principle, and
- Clerical Errors
- Errors of Omission
- Errors of Commission
- Compensating Errors.
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Errors of Principle
As per double entry system, every debit has its corresponding credit. The accounts will be arithmetically correct only if, there is the same amount at both debit and credit sides. The error of principle means recording the transaction violating the accounting policies and procedures.
For Example: treating the purchase of an asset as an expense, this is an error of principle. An error of principles is more likely to be committed when an accountant does not have a good understanding of accounting concepts and terms used in accounting.
In case of error of principle, there is no effect on the trial balance. This is because the amount is correctly posted on both debit and credit sides but, in incorrect accounts.
These types of errors arise due to mistakes committed while performing accounting work. There are three types of errors, as follows: –
- Errors of Omission: – Error of omission is divided into two parts i.e., Complete omission of transactions and partial omission of transactions. In case of error of complete omission, a transaction is completely omitted to be recorded in the books of accounts. An accountant forgets to record such entry in the subsidiary books. For
Example – omission to record goods sold to a vendor, omission to record asset purchased etc. In case of partial omission, the transaction is recorded at the debit side and omitted to be recorded at the corresponding credit side. Partial omissions affect only one account. For Example – Goods purchased from Mr. X, recorded in purchase book but no entry made in Mr. X’s account.
Errors of Commission
These types of errors are concerned with arithmetical accuracy. These errors constitute the following errors:-
- Recording wrong amount in subsidiary books
- Wrong totalling of subsidiary books.
- Posting incorrect amount in ledger accounts.
- Incorrect totalling of ledger balances.
- Posting at the wrong side of ledger accounts.
For Example – Goods sold to Mr. X amounted 5000/- was posted to the debit side of X’s account with 500 only. The error will reduce the debit total of trial balance by 4500. Suppose, at the same time receipt of 5000/- from Mr. P was wrongly credited to Mr. P’s account as 500/-. In this case, the amount of 4500/- is less credited. Such an error will reduce 4500 from the credit side of the trial balance.
First error reduced the debit balance total by 4500/- whereas the second error reduced the credit balance by 4500/-. Both the errors neutralized the effect of each other and will not affect the total of trial balance.
There is another point of view for the division of errors
a) Errors that affect the trial balance (the errors that trial balance does not agree)
(i) A wrong casting of the subsidiary books
(ii) Wrong balancing of an account
(iii) Posting an amount on the wrong side
(iv) Wrong posting, i.e., writing the wrong amount
(v) Omitting to post the totals of subsidiary book
(vi) Omitting to write the cash book balances in the trial balance
(vii) Omitting to write the balance of an account in the trial balance.
(viii)Writing a balance in the wrong column of the trial balance
(ix) Totalling the trial balance wrongly.
b) The errors that do not affect the trial balance
- Posting to the wrong account
- Compensating error
- Omitting an entry altogether from the subsidiary book
Solved Example on Types of Errors
Give reasons for the following transactions.
- Purchase book was undercast by 5000/-.
- Sales book overcast by 500/-.
- Debiting purchase account will complete the total and crediting the suspense account in absence of any other incorrect account.
- Debiting the sales account will decrease its balance whereas suspense account will be credited because there is no incorrect account credited.