Errors in bookkeeping can have a large impact on your
finances compared with their size and the ease at which they happen. The best
way to combat these errors is to understand what can happen and the best ways
to either catch them or prevent them outright. Here are five of the primary
forms of bookkeeping data entry errors and what you can do about them.
1. Errors of Omission
Simply put, this error describes a transaction that was not
recorded. These are vendor invoices that get lost on someone's desk, checks
that aren't recorded, or cash payments that don't get added to the cash
balance.
The most common way to prevent missed transactions is to
increase organization, standardize procedures, and ensure enough time for
bookkeeping tasks. In addition, regular reconciliation helps identify missing
items after the fact.
2. Errors of Transposition
Transposition refers to switching two digits in a string of
numbers. It's a simple and common data entry error, particularly in busy
offices. Rather than entering an invoice for $490, the amount is recorded as $940.
The good news is that the transposition of two adjacent
numbers is often identified because the resulting imbalance is divisible by 9.
In this example, the difference of $450 is divisible by 9. If a transposition
does get by you, diligent reconciliation of bank statements, payment accounts,
credit card entries, and other accounts will help make them visible.
3. Errors of Commission
To make a commission error means to enter a transaction
into the wrong sub-ledger. It's a payment applied to the wrong customer account
or the wrong invoice. It could also be an expense recorded as being office
supplies when it should really be shipping supplies. In this case, your
financial statements will be correct, but the sub-account (such as the vendor's
amount due) is incorrect.
Reconciliation is a good way to catch these errors. Compare
vendor statements as they arrive, for instance, to confirm that your accounts
payable ledger has the same information as the vendor's accounts. Having an
outside bookkeeper or accountant do checkups on your books can also provide an
independent eye to notice changes in patterns that may indicate errors of
commission.
4. Errors of Reversal
Double-entry bookkeeping keeps everything balanced through
the use of either debits or credits. But this means that you can occasionally
post a transaction to the wrong side of this equation. An incoming vendor
invoice might be accidentally posted as an outgoing customer invoice, for
example.
One way to prevent this category of mistakes is to separate
accounting tasks, both physically and when they are done. Keeping income
transactions apart from expense transactions — and keying them at different
times — creates more continuity and leaves less chance of making the wrong
choice.
5. Errors of Principle
As you manage the books for your small business, you'll
learn about the Generally Accepted Accounting Principles (GAAP). GAAP creates
standards that businesses abide by in order to ensure that statements are
reasonably reliable and can be compared on equal terms. So when an entry does
not follow GAAP standards, it creates an error of principle.
The more you and your staff learn about GAAP, the better
you will be at following its guidelines. If you have questions about how to
enter a transaction, consult with an accountant or bookkeeper rather than
guessing. And as you come to understand why certain rules are important or
beneficial, you can reason better on how to apply them in your
bookkeeping.
Where to Learn More
Want to know more about preventing and fixing these or
other common mistakes made during bookkeeping? Start by meeting with the
accounting pros at Williams &
Associates Tax Services. We'll help you devise better bookkeeping systems,
reconcile and do regular reviews, and understand how GAAP helps you. Call today
to make an appointment.
