Errors in Accounting – Types & Impact

Humans make mistakes. Accountants are human. Therefore, accountants make mistakes! Let's classify them.

Classification of Errors

Based on Detection by Trial Balance

1. Errors Revealed by Trial Balance

• Trial balance will NOT tally
• Easy to detect

2. Errors NOT Revealed by Trial Balance

• Trial balance WILL tally
• Difficult to detect
• More dangerous!

Types of Errors (Detailed)

1. Error of Omission

Definition: Transaction completely omitted (not recorded at all) OR partially omitted.

Types:

a) Complete Omission:

• Entire transaction not recorded in any book
• Example: Sold goods ₹10,000, forgot to record anywhere

b) Partial Omission:

• Recorded in journal but not posted to ledger
• Example: Recorded in journal, forgot to post to Ramesh's account

Trial Balance: Complete omission NOT revealed, Partial omission REVEALED

2. Error of Commission

Definition: Wrong amount recorded OR posted to wrong account of the SAME type.

Examples:

• Wrote ₹5,000 as ₹500
• Posted to Ram's account instead of Ramesh's account (both are debtors)
• Totaled purchases book as ₹50,000 instead of ₹55,000

Trial Balance: Usually NOT revealed (if both debit & credit wrong equally)

3. Error of Principle

Definition: Transaction recorded against wrong accounting principle.

Examples:

• Purchase of furniture (Capital Expenditure) treated as Purchases (Revenue Expenditure)
• Wages for installing machine (Capital) treated as Wages (Revenue)
• Sale of asset treated as Sales

Trial Balance: NOT revealed (debit-credit balanced, just wrong heads)

4. Compensating Errors

Definition: Two or more errors that cancel each other out.

Example:

• Sales understated by ₹1,000 (should be ₹10,000, written ₹9,000)
• Purchases understated by ₹1,000 (should be ₹20,000, written ₹19,000)
• Net effect: ZERO!

Trial Balance: NOT revealed

5. Error of Duplication

Definition: Same transaction recorded twice.

Example: Sold goods ₹5,000 to Mohan, recorded twice

Trial Balance: NOT revealed (if both debit & credit duplicated)

6. Error of Reversal / Complete Reversal

Definition: Correct accounts used but sides reversed.

Example:

• Correct: Dr. Cash ₹10,000, Cr. Sales ₹10,000
• Wrong: Dr. Sales ₹10,000, Cr. Cash ₹10,000

Trial Balance: NOT revealed (total debit = total credit, just reversed)

Summary Table

Error Type	Example	Trial Balance Reveals?
Complete Omission	Transaction not recorded	❌ No
Partial Omission	Recorded in journal, not in ledger	✅ Yes
Commission	Posted to wrong person (same type)	❌ No
Principle	Furniture treated as Purchases	❌ No
Compensating	Two errors cancel out	❌ No
Duplication	Recorded twice	❌ No
Reversal	Debit-Credit reversed	❌ No
Casting Error	Wrong totaling	✅ Usually Yes
Posting wrong amount	₹500 posted as ₹5,000	✅ Yes

Impact on Financial Statements

Error of Principle Impact

Wrong Entry: Furniture ₹50,000 debited to Purchases A/c

Impact:

• P&L Account: Purchases overstated by ₹50,000 → Profit understated
• Balance Sheet: Furniture (asset) not shown → Assets understated

Serious Consequences!

Quiz

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💡 Final Wisdom: "Errors are like bugs in code. Some crash the program (Trial Balance doesn't tally), others silently corrupt data (Trial Balance tallies but accounts wrong)!"