No matter the size of your business, even the smallest accounting mistakes can be detrimental to your operations. In some cases, they can cost you a fortune in damage repair. At other times, they can place a massive hit on your reputation. Armed with the results of a BlackLine study, a recent CFO Daily News article revealed the number one cause of financial mistakes is human error, representing 41% of all accounting mistakes. The consequences of such simple faux pas can spread far and wide in their damage potential. We at Westtown Insurance Group care about you and your business and want to keep you educated on common accounting errors and how to prevent them from happening to your business. Watch this video from Do Hard Money which covers what Errors and Omissions Insurance is.
What are the most common accounting errors?
- An accounting error is an error in an accounting entry that was not intentional.
- An accounting error should not be confused with fraud, which is an intentional act to hide or alter entries for the benefit of the firm.
- Accounting errors can include duplicating the same entry, or an account is recorded correctly but to the wrong customer or vendor.
Types of Accounting Errors
- Error of Original Entry
An error of original entry is when the wrong amount is posted to an account. The error posted for the wrong amount would also be reflected in any of the other accounts related to the transaction. In other words, all of the accounts involved would be in balance but for the wrong amounts.
- Error of Duplication
Error of duplication is when an accounting entry is duplicated, meaning it’s debited or credited twice for the same entry.
- Error of Omission
An error of omission is when an entry wasn’t made even though a transaction had occurred for the period. This is common when there are many invoices from vendors that need to be recorded, and the invoice gets lost or not recorded properly. An error of omission could also include forgetting to record the sale of a product to a client or revenue received from accounts receivables.
- Error of Entry Reversal
Error of entry reversal is when the accounting entry is posted in the wrong direction, meaning a debit was recorded as a credit or vice versa.
- Error of Principle
Error of accounting principle occurs when an accounting principle is applied in error.
- Error of Commission
Error of commission is an error that occurs when a bookkeeper or accountant records a debit or credit to the correct account but to the wrong subsidiary account or ledger. A payment to a vendor that’s recorded as an accounts payable, but to the wrong invoice or vendor is also an error of commission. The error would show as posted to the wrong vendor on the accounts payable subsidiary ledger.
- Compensating Error
Compensating error is when one error has been compensated by an offsetting entry that’s also in error.
Detection and Prevention of Accounting Errors
Keeping track of invoices to customers and from vendors and ensuring they’re entered immediately and properly into the accounting software can help reduce clerical errors. A monthly bank reconciliation can help to catch errors before the reporting period at the end of the quarter or fiscal year. Of course, no company can prevent all errors, but with proper internal controls, they can be identified and corrected relatively quickly.
Why does my company need coverage?
To put it very simply, everyone makes mistakes. Even with the best employees and the best risk management practices in place, mistakes will be made. No one is perfect. But, an error made at your business could be costly or even cause you to go under. You can protect your business with an errors and omissions insurance policy. Errors and omissions, or E&O, can save your company from certain customer lawsuits. At Westtown Insurance Group, we can provide coverage from many insurance carriers so you receive the Error and Omissions insurance for your budget and needs. Call us today at (610) 738-9400 or visit us online at https://westtowninsurance.com/ to discuss or review your current policy.
Source: https://incisive.com/the-financial-damage-caused-by-human-error-and-how-to-prevent-it/ and https://www.insurancejournal.com/magazines/mag-features/2004/07/19/44745.htm and https://www.patriotsoftware.com/blog/accounting/what-is-e-o-insurance-and-do-i-need-it/ and https://www.investopedia.com/terms/a/accounting-error.asp