Finance And Insurance

Accounting Errors of Omissioncommission and Principle



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Some accounting errors are so common that categories were created for them. Certain errors are input errors while others are procedural in nature. Accounting errors are material if they affect the economic decision taken by users of the information. As such, procedural errors, such as mistreatment of expenses are usually material and significant. There are three basic categories of errors in accounting.

== Errors of commission ==

An error of commission occurs when you record an incorrect value in posting. Such errors include original entry errors, transposition errors, calculation errors and reversal of entries.

An original entry error occurs when an incorrect figure is recorded and posted. A prime instance of this is the ten-key error, where you accidentally hit the number above the correct key. For example, if you enter 7, instead of 4, you would get a difference of 3, 30 or 3,000,000 even.

The transposition error occurs when you switch two digits in a number. For example, if you enter 71 as 17 or 428 as 824, you have committed a transposition error. Notice that the difference between the two numbers in a transposition error is always evenly divisible by nine. The result of 71 – 17 is 54 and 824 – 428 is 396.

Calculation errors occur when you use incorrect totals. For instance, if you properly record transactions in a sales ledger but incorrectly total this and use the incorrect figure in the income statement, a calculation error has occurred. Reversal of entries occurs when the correct figures are used in the correct accounts, but they were entered on the wrong side of the respective accounts. For instance, if you record a sales transaction by debiting Sales and crediting Cash/Bank, you commit a reversal of entries error.

== Errors of omission ==

Errors of omission can be one of the more difficult errors to detect, since they involve failing to record a transaction partially or completely. An error of omission may be hard to detect because it could lead to a balanced accounting equation. This type of error demonstrates why accountants and accounting students should double check their work properly to see if anything was omitted, instead of using a balanced Statement of Financial Position as validation. For example, if you fail to record depreciation in a period or record a devalued asset, such errors of omission would only be detected through careful scrutiny of all particulars.

== Errors of principle ==

Apart from being accurate and careful to include all figures, accountants must also ensure that they are procedurally accurate as well. An error of principle is one that is contrary to the fundamental principles, concepts and assumptions of accounting. For instance, if you record capital expenditure as revenue expenditure or treat withdrawals by the business owner as an expense, these go against the fundamental principles and held concepts in accounting. Such errors will skew the figures in the income statement and statement of financial position.

== Conclusion ==

In accounting, it is important to avoid making errors of commission, errors of omission and errors of principle. While seeing a balanced statement of financial position can be satisfying, it does not indicate that no errors exist in the recording and summarizing of transactions. It is easy to make any one of the three categories of accounting errors at any given time, hence the requirement that accountants be meticulous and alert.


 

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