Types of Errors in Accounting: A

Guide for Small Businesses

There are several different types of errors in accounting.

Accounting errors are usually unintentional mistakes
made when recording journal entries.

Small accounting errors may not affect the final numbers

in financial statements. Or they might cause major
distortions in the overall figures. These types of errors
require lots of time and resources to find and correct
them.

Since accounting errors can disrupt your business,

every small business should know the most common
types of accounting errors so it’s easier to spot and
correct them.

In this article, we’ll cover:

 Subsidiary Entries
 Error of Omission
 Transposition Errors
 Rounding Errors
 Errors of Principle
 Errors of Reversal
 Errors of Commission
1. Subsidiary Entries
Subsidiary entries are transactions that aren’t recorded
correctly. This mistake is only normally discovered
during a bank reconciliation, according to The Balance.

 For example, an invoice is entered in accounts

receivable as $10,000 instead of the $1000 actually
owing.

How to find it: The trial balance won’t show this error.
You’ll need to do a bank reconciliation i.e. check the
numbers in your books against the numbers on your
bank statement. It’s important to do this frequently. If
you only do it every six months, for example, you’ll have
to sift through six months of records to find the mistake.

2. Error of Omission
An error of omission happens when you forget to enter a
transaction in the books. You may forget to enter an
invoice you’ve paid or the sale of a service.

 For example, a copywriter buys a new business laptop

but forgets to enter the purchase in the books.

How to find it: Errors of omission are hard to discover.

One way to find them is to check if your credits equal
your debits in your trial balance. You may have entered
a credit for a transaction but no debit. Doing regular
bank reconciliations will also help you double check your
books for accuracy.
3. Transposition Errors
When two digits are reversed (or “transposed”), an error
is created in the books. It’s a simple error but it
completely throws off your accounting.

 Example: “3563” instead of “5363.”

How to find it: Compare the totals in your trial balance

with the totals in your bank statement. If the difference
between the two totals is evenly divisible by nine, you
probably have a transposition error on your hands,
according to Old Dominion University.

4. Rounding Errors
Rounding a figure can make your accounting inaccurate
and create a series of future errors. Either people or
accounting software can make this mistake.

 For example, 23.965 instead of 23.9646

How to find it: A tiny mistake that can be easily fixed by

reconciling your books regularly. Don’t let this mistake
snowball–nip it in the bud by checking your bank
statements against your books often.
5. Errors of Principle
A transaction that incorrectly uses an accounting
principle is called an error of principle. Errors of principle
don’t meet the generally accepted accounting principles
(GAAP). It’s also called an “input error” because, though
the number is correct, it’s recorded in the wrong
account.

 For example, personal expenses are accidentally

recorded as business expenses in the books.

How to find it: This requires scanning the trial balance

for potential errors, as debits and credits will probably
still balance regardless of the mistake.

6. Errors of Reversal
When an entry is debited instead of being credited, or
vice versa, this is an error of reversal.

 For example, a $500 invoice sent to a client is posted

in accounts payable instead of accounts receivable.

How to find it: Check your trial balance and find the
difference between the credits and debits (they should
match, or “balance”). Divide the difference by two and
check your trial balance for that number. It could be in
credits instead of debits, according to Old Dominion
University.
7. Errors of Commission
An error of commission occurs when an amount is
entered right and in the correct account but the value is
wrong–i.e. it’s subtracted instead of added or vice versa.

 For example, a payment is applied to the wrong

invoice. The amount owing by the client will still be
correct in the trial balance, obscuring the mistake.

How to find it: The trial balance will look right but the
client’s subledger (or entry details) will be off. The
method used for errors of reversal can also be used to
find the mistake.
 PROCESS OF RECTIFICATION OF ERRORS.

1. In the case of One-Sided Errors

Situation What to Do? Explanation

Only Gupta’s A/c was having an

We will find the shortfall in the debit
‘under debiting’ error of
Before the preparation of balance of Mr. Gupta’s A/c and post
Rs.1,800. That is why we will
the Trial Balance it on the debit side of the account. In
rectify only his account and his
this case, it will be Rs.1,800
ledger account only.

At the time of preparation of

Trial Balance, there will be a
After Trial Balance but shortage of Rs.1800 on the debit
Debit Gupta and Credit Suspense
before preparing Final side. In order to match it
A/c with Rs.1,800
Accounts artificially, we open a Suspense
account. Through rectification,
we will abolish the Suspense A/c
 In this case, there won’t be any
change in the rectification
because there is no involvement
After the preparation of the Debit Gupta and Credit Suspense
of a nominal account. In case of
Final Accounts A/c with Rs.1,800
a nominal account, we have to
rectify the Profit and Loss
Account also.

One-sided errors affect only one account. Hence, we assume that

another account related to the entry is correctly recorded. Let’s take
an example: Cash paid to Mr. Gupta Rs.2000, debited to Mr.
Gupta’s A/c as Rs.200

There can be 3 different situations in the accounting process at the

time of acknowledgment of the error, which are:
(a) Before the preparation of the Trial Balance
(b) After Trial Balance but before preparing Final Accounts
(c) After the preparation of the Final Accounts

There can be 3 different situations in the accounting process at the

time of acknowledgment of the error, which are:
(a) Before the preparation of the Trial Balance
(b) After Trial Balance but before preparing Final Accounts
(c) After the preparation of the Final Accounts

Special Mention: In this case, we assume that the Cash A/c is

correctly recorded.
2. In the case of Two-Sided Errors

Two-sided errors involve two accounts at the same point of time.

So, we have to make changes both the accounts. Let’s take an
example: Cash paid to Mr. Gupta Rs.2000, debited to Mr. Raman’s
A/c

Situation What to Do? Explanation

Wrong account debited is now

Before the preparation Debit Gupta and Credit Raman with
credited. Also, the right account
of the Trial Balance Rs.2,000
is debited.

There is no effect of two-sided

After Trial Balance but
Debit Gupta and Credit Raman with errors on the Trial Balance.
before preparing Final
Rs.2,000 Hence, there will be no
Accounts
Suspense A/c.

In this case, there won’t be any

change in the rectification
because there is no involvement
of the nominal account. In case
After the preparation of Debit Gupta and Credit Raman with
one of the accounts is a nominal
the Final Accounts Rs.2,000
account, we will rectify the P&L
A/c. In case if both the accounts
are nominal, then we will not
affect the P&L A/c.

Special Mention: In this case, we assume that the Cash A/c is

correctly recorded.
3. In the case of Error of Principle

Under error of Principle, accounting principles are wrongly applied.

Let’s take an example: Wages paid Rs.1,500 for the installation of a
new machine has been debited to the ‘Wages A/c’.

Situation What to Do? Explanation

Before the preparation of Debit Machinery and Credit Wages This is a two-sided error. Hence,
the Trial Balance A/c with Rs.1,500 both the accounts are rectified.

There won’t be any effect on

After Trial Balance but
Debit Machinery and Credit Wages the matching of the Trial
before preparing Final
A/c with Rs.1,500 Balance. hence, there will be no
Accounts
Suspense Account.

Since the transaction involves a

nominal account, P&L balance
Debit Machinery and Credit Profit needs to be changed. Hence,
After the preparation of
and Loss Adjustment A/c with P&L Adjustment account is
the Final Accounts
Rs.1,500 credited. It is because the wages
account reduces the profits of
the organization.
4. In the case of Error of Omission

An error of Omission is such kind of error in which the accountant

forgets to post a transaction either partially or completely. In such
error, no different entries are made under different situations. Under
this case, the accountant will record the transaction as soon as he
comes to know about it. Let’s take an example: Cash paid to
Mr. Verma Rs.1,000 is not recorded in the books of accounts.

Amount Amount
Date Particulars L.F.
Dr. Cr.

Verma Dr. 1,000

To Cash A/c 1,000

Note: In this case, the Trial Balance is not at all affected because
there is no entry made on either side of the books of accounts.
Moreover, there will be no existence of the suspense account in the
books of accounts. The same treatment prevails in all the different
situations.
5. In the case of Error of commission

Under this error, mostly error of posting takes place. In order to

counter this, the accountant follows the same procedure as in the
case of one-sided errors. Let’s take an example: Cash paid to
Mr. Verma Rs.2000, debited to Mr. Verma’s A/c as Rs.200

Situation What to Do? Explanation

We will find the shortfall in the debit Only Verma’s A/c was having an ‘under
Before the preparation of the Trial balance of Mr. Verma’s A/c and post it debiting’ error of Rs.1,800. That is why
Balance on the debit side of the account. In this we will rectify only his account and his
case, it will be Rs.1,800 ledger account only.

At the time of preparation of Trial

Balance, there will be a shortage of
After Trial Balance but before preparing Debit Verma and Credit Suspense A/c Rs.1800 on the debit side. In order to
Final Accounts with Rs.1,800 match it artificially, we open a Suspense
account. Through rectification, we will
abolish the Suspense A/c

In this case, there won’t be any change

in the rectification because there is no
After the preparation of the Final Debit Verma and Credit Suspense A/c
involvement of a nominal account. In
Accounts with Rs.1,800
case of a nominal account, we have to
rectify the Profit and Loss Account also.

Special Mention: In this case, we assume that the Cash A/c is

correctly recorded.