8 Common Accounting Errors to watch out for during the year-end close
It is an unfortunate reality, but accounting errors can disrupt the business.
Accounting books play a key role when you want to know the standing of the business. Unfortunately, errors can happen anyway. It doesn’t matter if you are using a desktop accounting system or a cloud-based accounting system. Also, business owners are more likely to make wrong decisions with accounting books containing errors. That is why getting things done is necessary.
But what is the best solution to this? What are those common accounting errors that we accountants must be careful about? How to prevent common accounting errors so that we can always keep the accounting books free of errors. In this blog post, we will explore the most common accounting errors and the best solution.
What are the most common accounting errors?
The integrity of your accounting books is only as good as the data you enter in your accounting books. There are various types of accounting errors that we must be careful about. Let’s have a look at each of them one by one.
1. Data entry errors
These kinds of errors are generally made by bookkeepers while recording transactions. The data entry errors can be caught during reconciliation. Here is the list of the most common data entry errors to watch out for.
- Entering the data in the wrong account
- Misunderstanding expenses as income or vice versa.
2. Error of omission
The error of omission occurs when you forget to enter the data into the accounting books unintentionally. Anyone can make these errors, especially in the beginning. For example, you have just bought a new laptop, and you have an invoice, but you forgot to enter the purchase in the accounting books.
3. Error of transposition
While recording the transaction, if the digits of the amount are reversed, it becomes the error of transposition.
Example: Recording the expense of $5225 instead of $2552.
It creates enormous differences, which may eventually impact the balance sheet. This error can be resolved by comparing the trial balance with the total in your bank statements. You can use a smart review tool like Xenett to autodetect and fix such errors effortlessly.
4. Error of commission
An error of commission is an accounting error that occurs when the bookkeeper or the accountant records transactions in the wrong account or for the wrong amount.
Example: A customer pays $1000 for an invoice, but the bookkeeper accidentally credits the payment to the wrong customer’s account.
The error of commission can be difficult to detect because it may not cause the trial balance to be out of balance. Yet, it can have a significant impact on the financial statements of the company.
5. Compensating errors
As the name itself indicates, the compensating error is an accounting error that is offset by another accounting error. Let’s understand this with the example: Suppose you erroneously overstate income by $ 5,000, but you also overstate the expenses by $ 5,000. Since the net effect is zero, it is difficult to find such errors, but as a matter of fact, two errors are made and need to be identified and resolved.
6. Error of principle
When we make any accounting error that does not comport with the Generally accepted accounting principles(GAAP), it is called an error of principle. Now, you might be wondering what exactly it can be. Well, this kind of error occurs when we record the transaction to the wrong account intentionally or unintentionally. The amount can be correct, but the place of the entry is incorrect.
Because the errors of principle are critical, they can have severe consequences on the business. The most common example of this error is recording personal expenses as business expenses. Small businesses are more inclined to make this error.
7. Error of duplication
The error of duplication occurs when you enter the same transaction twice or more than that. Such errors can be effortlessly detected when you use an intelligent clean-up tool like Xenett. Generally, the chances for the error of duplication increase when more than one person has access to the accounting system, and each of them works on the same.
8. The error of entry reversal
When you record the expense transaction as the transaction of income or vice versa. In other words, the debit entry is recorded as credit or vice versa. The error of the entry reversal can severely impact the company’s financial statements. Also, it can distort the company’s profitability, liquidity, and financial position.
How accounting errors can affect your business
No matter how big the accounting error is, you shouldn't undervalue the effects it could have on your business. Even seemingly insignificant differences might have serious repercussions. These errors may ultimately result in fines or the loss of important clients. Apart from that, accounting errors can have other serious consequences, such as:
- Incorrect income reporting
- Incorrect expense reporting
- Incorrect cash flow information
- Late payment fees
- Increased labor costs
- High chances of fraud
Also read: How To Review Accounting Books Effectively?
How to prevent common accounting errors?
The days of carefully reviewing data entry and spending hours finding and fixing errors are long gone. As promised earlier in this blog, we will be exploring the finest solution to prevent common accounting errors.
We won't go into the tired recommendations of "training your staff," "avoid overburdening your employees," or "exercising caution during data input." Such approaches frequently fail over time because we inevitably mess up and make the same mistakes again. Instead, we must adopt a smart technical approach that not only detects common accounting errors but also provides sustainability and efficiency.
Many accounting firms rely on Xenett to tackle this problem. Xenett is an intelligent cleanup tool that instantly identifies errors in your financial records. It scans your books to detect accounting errors like duplicate entries, unreconciled transactions, uncategorized entries, entries without names or locations, and more.
In order to find these disparities in your accounting data, it uses over 50 AI-based tests. It also understands previous trends and instantly notifies you about the anomalies. Doing so lets you keep track of errors that would be hard to spot manually.
The bottom line
Accounting errors are unavoidable, even when we exercise extreme caution. Sometimes, we notice them and fix errors right away, but other times, they might linger from month to month, causing our books to be inaccurate. That is why it is critical to utilize intelligent technologies like Xenett to ensure our books are error-free.
Xenett has saved accountants hundreds of hours, particularly during the month-end and year-end closure. It detects and corrects accounting problems automatically, allowing accountants to focus on more strategic activities. Book your demo call to learn more about it.