Meaning and Concept:
The errors or mistakes which are committed in the journal, ledger, and any other financial statements are known as accounting errors. Accounting errors may be defined as those mistakes which are generally committed while recording the financial transactions in the books of accounts. These errors may be committed while recording the transactions in the journal and posting them in the ledger accounts. Such errors may be technically committed or committed due to lack of knowledge of accounting principles and rules. Accounting errors distort the true business results. Therefore, these errors must be properly located and corrected for ascertaining the true profit or loss and financial position of the business.
Types of Errors
- Errors of omission: Transaction which is completely or partially omitted to record or not posted to the ledgers is called errors of omission. Due to such errors on both debit and credit side, there will be no effect on the equality of trial balance. For example, goods purchased from Mr. X for Rs. 10,000; if this transaction is not recorded in the book at all; it means neither purchase a/c is debited nor X’s a/c is credited, then debit side of purchase a/c and credit side of X’s a/c is affected by equal amount. So Trial Balance shows equal balance.
- Errors of commission: When transactions are recorded in wrong amount or posted in wrong account or posted on wrong side of account, such errors are called errors of commission. Entering wrong amount in journals and ledgers, posting in to wrong account, posting to wrong side of account, etc are the errors of commission. When the transaction is recorded wrongly on both sides, it would have no effect on equality of trial balance. For example, if goods purchased for Rs.20, 000, is wrongly debited to the purchase a/c and credited to the cash a/c by Rs. 2,000, trial balance shows equality.
- Compensating errors: When there are two or more errors and one error is compensated or neutralized by another error, this is known as the compensating errors. Error on excess amount on debit can be compensated by less debit on to another ledger. As there is equal amount of error on both debit and credit side, it would have no effect on trial balance. For example, furniture account was to be debited by Rs.5, 000 but if it was debited by Rs 500 and machine account was debited by Rs. 5000 but it was to be debited by Rs.5 00. It means there is short on debit side of furniture account by Rs. 4,500 and excess on debit side of machine account by the same amount.
- Errors of duplication: When same transaction has been recorded and posted twice in the journal and ledgers, it is known as the errors of duplication. Although the errors are committed, trial balance shows the equality between debit and credit. For example, furniture purchase for Rs. 20,000 debited to furniture account and credited to cash account twice.
- Errors of principle: Errors of principle are those where some fundamental principle of accounting is not properly followed while recording and posting the transactions. When transactions are not properly allocated between capital and revenue nature, the mistakes are called errors of principle. This may be due to the lack of correct knowledge of the accounting principles. For example, furniture purchase is debited to purchase account and machinery sold is credited to sales account. Trial balance remains unaffected by such errors.
- One sided errors: An error, which effects only one side of an account, is known as one sided error. These errors affect only one account or book. It is an error which affects only one aspect of a transaction. Generally, the following errors are treated as one sided errors:
- Over or under casting of subsidiary book.
- Wrong(figure) posting to the one ledger account.
- Omission for posting in a ledger.
- Two sided errors: Errors committed on both debit side of one account and credit side of another account or same account is known as two sided errors. In other words, a two sided error is that which affects two or more accounts. Such errors do not affect the trial balance. Errors of omission, errors of duplication, errors of principle, and errors of compensation are some examples of two sided errors.
Errors Disclosed by Trial Balance:
Due to the following errors, trial balance shows the unequal balance, which are termed as errors disclosed by trial balance:
- Wrong totaling of subsidiary books.
- Posting into wrong side of ledger
- Wrong totaling and balancing of ledger
- Omission on one side of a ledger
- Posting of wrong amount on a ledger.
- Omission of any account in trial balance.
- Wrong totaling in trial balance.
Errors not disclosed by trial balance:
When there is equal amount of error on both debit and credit side of the ledgers, it would have no effect on trial balance. In spite of the errors trial balance shows the equality between debit and credit. These errors are called errors not disclosed by trial balance. Following are the examples of such errors:
- Errors of omission
- Errors of commission
- Compensating errors
- Errors of duplication
- Errors of principle
Methods of Locating Errors (How to locate error?)
- The total trial balance can be checked once again.
- Find out difference in total of debit and credit of trial balance.
- Check total of subsidiary books.
- If the difference is divisible by 2, look for a balance of half the difference which may be on the wrong side of the trial balance.
- Check the extraction of balances from the ledger.
- If the causes of difference have still not been found, then open suspense account for the preparation of final account.