Accounting errors can be a costly oversight for any business, large or small. These mistakes can lead to inaccurate financial reporting, which in turn can affect decision-making, compliance, and the overall health of the business.

Anyone can make an accounting error, including the Pentagon to the tune of $6.2bn according to Reuters!

In this article, we will explore the various types of accounting errors, how they affect small businesses, and provide practical tips on how to avoid them.

Accounting errors are unintentional mistakes made in the process of recording, classifying, summarising, and interpreting financial transactions. 

These errors can occur at any stage of the accounting process and can significantly impact the accuracy of financial statements. 

Identifying and correcting these errors promptly is crucial for maintaining the integrity of your financial records.

Types of accounting errors

There are several common types of accounting errors, each with unique characteristics and implications. Understanding these errors is the first step towards preventing them.

1. Transposition Errors

Transposition errors occur when digits are mistakenly swapped. For example, recording £1234 as £1324. This type of error can result in significant discrepancies in your financial statements.

We have two simple tips for avoiding such errors.

Firstly: Check, check, and double check. Always review entries carefully before finalising them. It’s worth taking those extra couple of minutes.

Next, by using accounting software that can detect and alert you to potential issues, the chance of human error is minimised.

2. Rounding errors

Rounding errors happen when numbers are rounded incorrectly. While minor, these errors can accumulate and lead to substantial inaccuracies over time.

Again, accounting software can be helpful here. Similarly, regular reviews of financial statements will reduce mistakes. 

Crucially, you company should establish and adhere to a consistent rounding policy, so everyone (including new team members) are on the same page when it comes to rounding.

3. Omission errors

Omission errors occur when a transaction is completely left out of the financial records. This can lead to incomplete financial statements and inaccurate financial reporting.

We find these errors are avoided largely through comprehensive record-keeping and ensuring that all transactions are recorded promptly. 

It’s also worth regularly reconciling your accounts (have a fixed schedule for this) to ensure all transactions are accounted for.

4. Commission errors

Commission errors happen when an entry is recorded in the wrong account. 

For instance, recording a utility expense in the rent expense account.

Communication (and training) is key here. Make sure staff are kept updated and are well-versed on proper account classification. Building out, and maintaining,  a detailed chart of accounts is well worth doing.

5. Compensating errors

Compensating errors are a pair of errors that cancel each other out. For example, an error in recording revenue is offset by an error in recording expenses.

Our tips for avoiding such errors are:

  • Regularly reviewing financial statements in detail.
  • Ensuring that different individuals are responsible for different aspects of the accounting process.
  • Conduct regular internal audits to detect and correct compensating errors.

Again, careful checking, and accountancy software, will undoubtedly help in avoiding compensating errors.

6. Principle errors

Principle errors occur when an accounting principle is applied incorrectly. For example, recording a capital expenditure as a revenue expense.

These errors can often come down to lack of experience or knowledge of accounting principles. 

Continuous training and development for those responsible for managing accounts helps ensure staff can feel confident in applying principles – while of course, seeing support from accounting professionals is the most direct solution.

7.  Error of original entry

One of the most common errors, this happens when the original figure recorded is incorrect, such as recording £500 instead of £50.

Once again, double-checking, and then triple-checking, will help avoid these mistakes – as can accounting software.

Additionally, always verify amounts entered against source documents to be 100% sure of accuracy. Find out how long you should keep accounting records for.

How accounting errors affect a small business

Accounting errors can have a profound impact on small businesses, which often operate with limited resources and tighter margins. 

Even minor errors can lead to significant financial losses over time. Incorrectly recorded expenses or revenues can result in overpayments, underpayments, or missed payments, directly affecting the bottom line.

Errors in accounting can lead to inaccurate financial statements, which are crucial for making informed business decisions. Misleading financial data can result in poor business strategies and missed opportunities for growth.

Furthermore, small businesses must adhere to various regulatory requirements. Accounting errors can lead to non-compliance, resulting in fines, penalties, and legal issues. This can be particularly damaging for small businesses that may not have the resources to handle such complications.

Indeed, financial inaccuracies can damage the reputation of a small business, affecting relationships with suppliers, customers, and investors. Trust is a critical component for small businesses, and accounting errors can erode this trust.

There’s also the question of auditing. Frequent accounting errors can increase the likelihood of audits by tax authorities.

Audits can be time-consuming, stressful, and costly, diverting valuable resources away from core business activities.

Best practices to avoid accounting errors

Preventing accounting errors requires a proactive approach. These are 5 steps you should take at the start of the financial year.

We’ve discussed a number of solutions to specific types of error above in this article, but here are some general best practices to help you avoid these common pitfalls:

Robust internal controls

Internal controls are essential for preventing and detecting accounting errors. This includes segregation of duties, regular audits, and thorough documentation of all financial transactions.

Regular training and development

Ensure that your accounting staff are up-to-date with the latest accounting standards and practices. Regular training sessions can help reinforce good habits and introduce new techniques for accuracy.

Utilise technology

Modern accounting software can significantly reduce the risk of errors by automating repetitive tasks, providing real-time error detection, and ensuring consistent application of accounting principles.

Conduct regular reconciliations

Regular reconciliation of accounts can help identify and correct errors promptly. This includes bank reconciliations, supplier statements, and customer account reconciliations.

Encourage a culture of accuracy

Foster a workplace culture that prioritises accuracy and attention to detail. Encourage staff to double-check their work and take the time necessary to ensure entries are correct.

Seek professional assistance

When in doubt, seek professional assistance. Experienced accountants, such as those at Accountants East London, can provide valuable insights and help ensure that your financial records are accurate and compliant with all relevant regulations.

Types of accounting errors and how to avoid them

For other informative guides, check out our blog. Recently we covered overlap profits relief for the self-employed

Accounting errors can have serious consequences for your business, from financial losses to legal repercussions. 

By prioritising accuracy, utilising technology, and fostering a culture of continuous improvement, you can minimise the risk of accounting errors and ensure that your financial statements reflect the true health of your business.

Remember, accurate accounting is not just about compliance; it’s about making informed decisions that drive growth and success.

As a trusted provider of accounting services for more than thirty years, Accountants East London are dedicated to helping businesses navigate the complexities of financial management. 

At Accountants East London, we are committed to helping businesses achieve their financial goals through meticulous and accurate accounting practices. 

Contact us today to learn how we can support your business and remove accounting errors.