The secret to understanding what’s going on in your business is your accounting system. It is essential for filing tax returns and fulfilling other legal requirements. That is why doing things correctly is crucial. Mistakes can, unfortunately, occur whether you utilize a desktop or cloud-based accounting system. It’s critical to comprehend potential problems and how they could affect your company. Even more important: Knowing how to correct common accounting errors and avoid future ones.
What are the most common types of accounting errors & how do they occur?
The integrity of your accounting system relies on the accuracy of the data you enter. This includes putting items in the right account, using the correct description or code, and entering the correct amount.
Unfortunately, accounting errors can result from simple mistakes or misunderstandings of accounting rules. To avoid these errors, be sure to review accounting reports carefully.
Data entry errors
Data entry errors are mistakes that occur when data is entered into an accounting system. Some common data entry mistakes include:
- Enter Items into the incorrect account.
- Considering costs to be income or vice versa.
- Transposing numbers.
- Leaving out or duplicating an entry.
- Removing or adding a number or decimal place
Error of omission
This is just an oversight where an item isn’t recorded. For example, an invoice is paid but not noted as received, or a tablet is purchased but not recorded in the accounting system. This can happen if documentation is misplaced and never gets recorded.
Error of commission
This is putting an item in the wrong place. The amount is correct, but the wrong sub-account is used. For example, let’s say you get paid for an invoice but record the money against an invoice from a different client. Your total payments are correct, but what’s shown for a particular customer is wrong.
Error of transposition
This error is caused by reversing numbers, which can lead to overstating or underestimating the amount of an item. For example, if you enter an expense as $946 but mistakenly enter it as $496, this produces $450. If this is a deductible amount that isn’t claimed because of the error, it can be costly.
This takes place while you input the equal earnings or fee object extra than once. For example, such common bookkeeping mistakes can arise whilst numerous human beings have to get the right of entry to the accounting device and all of us make equal entries.
Error of duplication
This happens when you enter the same income or expense item multiple times. Such errors can occur, for example, when multiple users access the billing system and each user creates the same entry.
Error of principle
This error recorded an item that did not conform to generally accepted accounting principles (GAAP). Usually, this happens when an entry is made in the wrong account. The amount is correct but simply entered in the wrong place. A procedural mistake of principle is a significant one since it may have fatal consequences. The most typical illustration of a fundamental error is classifying an owner’s personal expenses as business expenses.
The error of entry reversal
It is the result of treating an expense as an item of income or vice versa. Instead of posting a $250 bill to your Accounts Receivable, you misplace it as Accounts Payable (i.e. write it as an expense).
How can accounting errors affect your business?
Common accounting errors may be minor or substantial. Either way, they can have serious consequences:
- Tax returns are incorrect. Inaccurate expense reports can distort a business’s calculated operating profit margin or lead to over-reporting.
- Cash flow information is incorrect. If the item is not reported correctly, it may overestimate or underestimate the amount available to pay the bill.
- Inaccurate expense reports. Deductible costs could not be recorded due to misclassification or omission of business expenses. This can result in paying too much in taxes.
- Increased labor costs. Correcting classification errors in the background will take time for employees who are already busy with year-end reports.
- Late payment fee. Invoices may become past due and incur extra charges and interest if categorization mistakes are found later in the accounting cycle.
- Income and expenditure are not consistent. Misclassified expenses can lead to misreporting to companies using accrual accounting. Expenses must correspond exactly to the income they generate. It won’t go as it should if a cost is categorized in the incorrect month or year.
- Fraud detection. Unfortunately, employee fraud, including embezzlement, can happen in any business. When the entries don’t match, it could indicate that something is wrong and requires further investigation.
How can you prevent common accounting errors?
Taking care of your financial information is the first line of defence to ensure items are properly classified and entered correctly on your books. Here are some steps you can take to facilitate healthy bookkeeping and accounting for small businesses.
Working with online bookkeeping services to help you keep your books and consult an accountant when changes occur in your business that has significant accounting implications
1. Train staff on data entry accuracy
Ensure that staff members who input costs into your accounting system are familiar with the accounts and descriptions. Please take the time to thoroughly explain your system. Some software may offer employee training, so take advantage of this option.
Set company policy on documentation procedures so that entries can be made properly and accurately. For example, record employee reimbursements as they are made after they submit an expense report so you know the numbers are correct.
And make sure there’s someone familiar with accounting entries who can answer questions when they arise.
2. Choose the Right Accounting software:
Using an accounting software program like QuickBooks or FreshBooks to automate the process of all accounting and bookkeeping tasks. But getting automated software may also have to face some errors sometime. Like QuickBooks Company file Errors, Network errors, etc.
Make sure your accounting system is up to date. To streamline the whole billing process, software and cloud versions are always being developed. The cloud-based system updates automatically. Desktop software should be purchased every few years to stay current.
3. Don’t overload your employees
Overworked employees are more likely to make simple data entry errors than if they had enough time to manage the activity. However, it’s important that your account is up to date and that you don’t fall behind. Consider ways to simplify and improve data entry and avoid errors, such as using expense reporting software to easily enter data into your accounting system.
4. Implement internal controls
Apply the best practices that can help detect and correct accounting and bookkeeping errors. For example, do a monthly bank reconciliation to detect problems and errors that are no longer on your books. Statements from credit cards work similarly. To ensure that charges have been properly put into your accounting system, review these on a monthly basis.
5. Check for differences between the budget and actual expenses
Use your accounting system to keep track of your finances. Your budget may indicate that a certain amount should be spent on a particular item or activity, but the entries don’t match. Comparing your actual costs with your budget can help you spot misclassification (or at least account for the discrepancy).
6. Adopt best accounting practices and standards for your business
Don’t let your employees procrastinate. Set deadlines for data entry and reconciliation to ensure that mistakes are immediately discovered and readily fixed.
Understand accounting standards so they are integrated into your accounting system. US-based private companies use GAAP for accounting. This shows when and how income and expenses are reported. Your accounting system should reflect these standards.
The Bottom Line:
If you have problems with misclassifications or want to avoid them altogether, you should work with professionals who can ensure that your accounting system is working properly and that your