Every organisation wants to determine the position of the business at the end of an accounting period and for that, each transaction will be recorded by the accountants by taking proper care.
But there will always be certain transactions which will contain errors that are generated during the recording of the transaction.
The impact of such errors in accounting will be on the final accounts. Therefore, it becomes imperative to find and rectify such errors, which will help an organisation in determining it’s true financial position at the end of the accounting period.
Errors in accounting are broadly classified into two categories which are as follows:
- Error of principle
- Clerical errors
These errors will be discussed in detail in this article.
Error of Principle: Error of principle is said to occur when the accountant records a transaction that does not comply with the rules of accounting. As per accounting rules, for every debit, there should be a corresponding credit.
When a transaction violates this rule, an error results from it and such an error is known as the error of principle. Recording of such a transaction does not have an impact on the trial balance, it simply means transactions are recorded but in incorrect accounts.
For eg: An asset is purchased and is recorded as an expense in the account.
Clerical Errors: Clerical errors are those errors that are generated from the improper recording of transactions. Clerical errors are further of three types and are discussed below
- Errors of Omission
- Errors of Commission
- Compensating Errors
Errors of Omission: Errors of omission are those types of errors that are generated when the accountant forgets to record an entry. There can be two variations of such errors, one is the complete omission of transaction in which the transaction is not recorded in books of accounts.
The second type of error is the partial omission, in which the accountant records the transaction in either the debit or credit side and forgets to record the transaction on the opposite side.
Complete omission – Failure to record the purchase of an asset
Partial omission – Credit sales of ₹5000 to Raj, in this transaction, the sales entry is recorded, but the entry for Raj’s Account is not done, it leads to partial omission.
Errors of Commission: These types of error result from the negligence of the person who is in charge of recording the transactions. These types of errors have an impact on the trial balance and the examples of such errors can be the recording of incorrect amounts and incorrect totalling in the ledger or subsidiary books or posting at the wrong side of ledger accounts.
Compensating errors: Compensating errors occur when one wrong entry neutralises the impact of another incorrect entry. These entries cancel the other error that is recorded.
For e.g: If Jay has purchased some goods amounting to ₹4000 and the same has been recorded as a debit on his account as ₹400. The impact of such a transaction will be the reduction of the debit side by ₹3600.
Similarly at that time, if Viru has paid an amount of ₹4000, and it is recorded to Viru’s account as ₹400, it will create a reduction in the credit balance by ₹3600.
From the above example, we can see that one error in recording led to reduction of the debit side balance by an amount of ₹3600, and another error led to the reduction of credit side balance by ₹3600.
Both these transactions cancelled the effect of each other and such an error will not change the trial balance total.
This concludes the topic of Types of Errors in accounting. It is regarded as an important concept for Commerce students. For more such interesting articles, stay tuned to BYJU’S.