Accounting errors don't have to be anything significant to cause disruptions to your business. Often, an error as simple as a mistyped figure or misplaced decimal will distort your overall figures, costing you lots of resources and time to find and correct them.
To save you some time, here are four of the most common accounting errors, how to find them, and what you or your small business accountant can do to fix them:
1. Errors of Principle
Errors of principle refer to mistakes made when recording accounting entries that accurately reflect the value of a transaction but are put into the wrong account. These errors can be challenging to identify as they may still balance out correctly. Despite the amounts being accurate, these errors can significantly impact the financial statements and should be checked for regularly.
To find these mistakes, you should look at the trial balance to check for any discrepancies in the debits and credits. This will help to identify any errors, such as personal expenses being recorded as business expenses.
2. Errors of Omission
An error of omission is when something is left out or forgotten. It often occurs when a transaction is not recorded even though it happened. This can happen when there are many invoices to process, and one gets lost or overlooked. This results in an entry not being made in the accounts payable account to show that the company owes money to a vendor or supplier.
Errors of omission can be challenging to identify. To ensure accuracy in your books, you should have a system to record each transaction. Checking that your credits and debits are equal in your trial balance can help you find errors of omission.
Additionally, regular bank reconciliations can help you find discrepancies in your records. Lastly, keeping track of receipts and paperwork for petty cash payments can also help you avoid making errors of omission.
3. 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. Accurate rounding is an integral part of accounting and can directly affect the accuracy of financial reports. It's essential to understand how rounding works and how it impacts your financial statements.
The most important thing to remember regarding accurate rounding is to be consistent. A company should use the same method if it rounds up or down for one transaction. This will help ensure that the company's financial statements are accurate and reliable.
4. Transposition Errors
One common mistake often overlooked is when two digits are reversed or "transposed". This may seem like a small mistake, but it can considerably impact your financial statements.
When a transposition error happens, the numbers are still correct but in the wrong order. For example, if you wrote down the number "17" but accidentally reversed them to "71", the numbers are still correct, but the order is wrong. This can lead to incorrect calculations, book entries, and other errors.
It is crucial to double-check your numbers for any transposition errors before you enter them into your accounting system. Ensure all the numbers are in the correct order and the calculations are correct. If you spot a transposition error, you can quickly correct it before it causes any significant problems.
Conclusion
If you're new to balancing books as a small business owner, finding these errors can set you back significantly in terms of time and resources. This is where a small business accountant can help. A small business accountant will not only be experienced enough to spot these common errors, but they'll also establish a system designed to prevent these errors from happening in the first place.
Do you need an accountant for your online business? The ECommerce Accountant can help by keeping you compliant with regulations, increasing your profit, forecasting cash flow, and more. Contact us today to get started.
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