4 Common Accounting Errors and How to Prevent Them

Mistakes happen — even in buttoned-up accounting departments. Despite everyone's best efforts, errors can (and do) make their way into accounting processes and cause all sorts of havoc. A transposed digit can throw debits and credits noticeably out of balance, or a reversed entry can cause an imperceptible error to casual readers. That's why it's important to have a plan in place to detect, minimize and fix mistakes. Error prevention may be a loftier, even impractical, objective given the human element involved, though the right accounting software controls can help.

Accounting errors are unintended accidents; they are the result of an inadvertent mistake. Sometimes accounting errors are caused by a slip of the hand, like transposing a number or hitting an incorrect key. Other times they stem from a misunderstanding of accounting rules or company policy. Nevertheless, any accounting department worth its salt aims to limit errors in its accounting data, especially data that flows into financial reporting used by internal and external stakeholders. Errors can be embarrassing at best, misleading at worst.

Accounting errors that are evident on a trial balance are easy to identify and fix as part of the accounting close. But for the majority of accounting errors — those that are undetectable at the trial balance level — more effort is required. For this reason, it's important to put processes in place to detect these four common accounting errors:

1.) Data entry errors. These are basic accounting mistakes. Data entry errors include transposed numbers, typos and other (often manual) slipups, like a misplaced decimal.

2.) Errors of commission. This category of errors arises from an incorrect action — for example, a transaction is recorded but some part of it is wrong, such as using an incorrect general ledger account number or using a miscalculated or improperly rounded value. Reversed entries, where debits and credits are improperly switched, and duplicated entries are also errors of commission.

3.) Errors of omission. These errors happen when a transaction is overlooked and not recorded. It's simply left out of the accounting records.

4.) Errors of principle. Errors of principle occur when the wrong accounting treatment is applied to a transaction. Errors of principle are significant technical accounting errors, as the resultant transaction will not be in accordance with Generally Accepted Accounting Principles (GAAP), either because the wrong guidance was followed or because it was followed incorrectly.

It's especially tricky to find accounting errors that compensate for each other. Sometimes these errors manage to unintentionally offset each other, masking the underlying mistake. For example, lease expenses for two identical company cars can be duplicated in one department and omitted in another, making totals appear accurate even though individual departmental costs (and associated key performance indicators) are incorrect.

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