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Monday, December 21, 2009

Details about Errors in Accounting

Errors of transposition

An error of transposition is when two digits in an amount are accidentally recorded the wrong way round.

For example, suppose that a sale is recorded in the sales account as 10560$, but it has been incorrectly recorded in the total debtors account as 10650$. The error is the transposition of the 6 and 5.

Errors of omission

An error of omission means failing to record a transaction at all, or making a debit or credit entry, but not the corresponding double entry.

Foe example, If a business receives an invoice from a supplier for 500$, the transaction might be omitted from the book entirely. As a result, both the total debit and the total credits of the business will be out by 500$.

Error of principle

An error of principle involves making a double entry in the belief that the transaction is being entered in the correct accounts, but subsequently finding out that the accounting entry breaks the rule of an accounting principle or concept.

For example, repairs to a machine costing 300$ should be treated as revenue or expenditure, and debited to a repair account. If, instead, the repair costs are added to the cost of the fixed asset as capital expenditure an error of principle would have occurred. As a result, although total debits still equal total credits, the repairs account is 300$ less than it should be and the cost of the fixed asset is 300$ grater than it should be.

Error of commission

Errors of commission are where the bookkeepers make a mistake in carrying out his or her task of recording transaction in the accounts.

For example, putting a debit entry or a credit entry in the wrong account or errors of casting (adding up)

Compensating errors

Compensating errors are errors which are, coincidentally, equal and opposite of one another.

For example, two transposition errors of 540$ might occur in extracting ledger balances, one on each side of the double entry. In the administration expenses account, 2282$ might be written instead of 2822$, while in the sundry income account, 8391$ might be written instead of 8931$. Both the debits and the credits would be 540$ too low, and the mistake would be not apparent when trial balance is cast. Consequently, compensating errors hide the fact that there are errors in then trial balance.


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