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When an error is discovered in the auditing process, it should be corrected immediately to prevent the proceeding of wrong data as it results in unreliable financial statements. Mistakes due to the error in calculations, etc. require immediate corrections. But how you correct it, depends on the type of error and whether or not the error can be counterbalanced.
Accounting errors can have an impact on the financial aspect of working capital, cash flow, tax and so forth for your business. However, these accounting errors are not counted as frauds. Errors happen unintentionally, whereas accounting frauds are deliberate. There are numerous reasons behind these errors. We have listed a few common accounting errors and how you can make a correction of errors in accounting:
Imbalance in Income and Expense Statement
Revenue accounts should have credit balances while expense accounts should have debit balances. When the accounting data is entered on the incorrect side of the balance sheet, there are differences and errors in the balance sheet.
SOLUTION: CHECK YOUR INCOME STATEMENT FOR ERRORS
Check your income statement to make sure that the revenues and expenses have the right credit and debit balance respectively. If there's an account with the incorrect balance, pull up the details of the account in order to find the entry that has caused the error.
Recording Transaction in the Prior Period
Once you have closed the books of accounts for the fiscal year, do not go back to change any details. Certain accounting software like QuickBooks, don't allow you to lock a prior period financials, there is a possibility that you can post the current year's entries in a prior period if you aren't careful.
SOLUTION: REVIEW PRIOR PERIOD BALANCE SHEET
If by any chance you have recorded the prior year's transactions on the balance sheet, you can change it. Therefore, check your prior period balance sheet to make sure that it hasn't been noted incorrectly since you last closed the books. If it has changed, you'll need to investigate.
Misclassifying expenses means that the accounting systems will inaccurately reflect on the financial aspect of your business. It will also cause trouble if your finances and taxes are not accurate. When the information is being entered in your financial statements, it’s easy to pick the wrong expense account as well as account description.
SOLUTION: INSPECT THE EXPENSE STATEMENTS PERIODICALLY
Assign a professional to scan your expenses periodically so that it is accurate. At times, expenses related to any meals are placed in the lease expense account, which can be an actual cause behind the accounting errors of your expenses. Another indication that the expense may be misclassified is unexplained budget-to-actual differences.
Error of Omission
An error of omission in accounting usually occurs when a bookkeeping entry has been completely omitted from the accounting records. For instance, a credit sale to Sam of $300 is not entered in the sales book that becomes an error of omission in the books of accounts.
SOLUTION: SEEK HELP FROM AN ACCOUNTING PROFESSIONAL
Hire an accounting professional as he will accurately list down all the data entries in the financial statements in the appropriate balances. This will not only reduce the risk of accounting errors but also save more money as there will be fewer issues. Assigning an expert will also make sure that the problem of omission will not be there.
A compensating error occurs when two or more errors cancel out each other. For instance, if the fixed assets account is incorrectly totaled and understated by 400 and the rent account is incorrectly totaled and overstated by 400 - the two errors cancel each other out.
SOLUTION: CROSS-CHECK ALL THE ENTRIES
If you spot any errors in your balance sheets like inefficiency in depreciation or unknown differences in the total amount of your balance sheet, cross-check all the entries. Cross-checking all the entries accurately ensures that you find and eliminate compensating errors.
All the accounting errors should be identified and corrected on time. if you are unable to avoid all the accounting errors yourself, contact an accountant who will help you with the same.