If you are a small business owner, you probably handle most or all of your own bookkeeping and accounting. This may mean that you are spending time on important tasks that are not your speciality. You may also be an accountant or bookkeeper working on other people’s books, but you are dissatisfied with your current software and may be looking for an alternative. Double entry accounting, or recordkeeping that involves two matching entries, has some built-in error protection, but there are still many errors that an inexperienced user may make. Some of them are easier to find than others, and most are easily fixable once detected. Here are 5 common accounting mistakes that you may find (but hopefully don’t!) in your small business’ bookkeeping records.
A subsidiary error is when the amount of a transaction is entered incorrectly. Both halves of the double entry accounting entry are entered with the same incorrect amount. An example of this would be if a payment of $4,000 was incorrectly entered as $400 for both the debit and credit sides of the entry. Because both sides of the double entry were the same, the books would still balance at the end of the accounting period. The trial balance, which is a pre-balance sheet test to ensure the debits and credits all match, would still show equal debits and credits. The way to catch a subsidiary error is to reconcile your bookkeeping with your bank statement. The bank statement would show the actual amount paid as opposed to the amount entered into the accounting software.
Avoiding these sorts of errors through regular bank reconciliations is critical. These are not the sort of errors that can be caught by accounting software, and can have drastic consequences for the accuracy of your accounting records. To correct a subsidiary error, you need to make a reversing entry. This will credit the debit and debit the credit for the incorrect amount, effectively taking it off your books. Then you can make the double entry for the correct amount.
This error is, like the name suggests, simply missing a transaction altogether. This may have significant or minor consequences for your business. Missing a $20 transaction may not have much of an impact on your bottom line, even if your business is very small, but omitting a larger transaction may catch you off guard later when the mistake is discovered.
Accounting software such as Automa8e can help you avoid omission errors. If you are solely relying on paper records and manual data entry to conduct all your bookkeeping, it can be easy to overlook a critical invoice or receipt. However, double-entry accounting software such as Automa8e allows you to record transactions of the connected bank account. Each penny going in and coming out of your business bank account will be tracked and loaded automatically into your software, meaning that no omission errors can occur.
If you identify an omission error, correction is as simple as making the appropriate entry.
Error of Principle
Errors of principle are most often made by people who are not skilled in accounting. An error of principle occurs when someone uses the wrong accounting principle, or does something like mixing personal and business finances. This leads to mistaken accounting or a muddying of the books in a way that makes them difficult to understand. For instance, if a personal expense is classified as a business expense, this would be an error of principle. A different, and subtler, error of principle would be if revenue from a sale was classified as a cash receipt when it ought to have been classified as a receivable. Errors of principle are often difficult to catch and correct, so it is wise to consult an expert or do some research if you are in doubt.
A transposition error is simply a number that was entered backward or reversed – for instance, 7589 instead of 5789. This type of error, like the others, is detectable through reconciliation with the bank account. If you discover during reconciliation that your bank balance differs from your general ledger balance by an amount that is divisible by 9, you most likely have a transposition error to find.
Correcting a transposition error involves reversing the incorrect amount, and then entering the correct amount. It is good practice to leave a note in your accounting where you have reversed or corrected a journal entry. This provides a reference for yourself and any others who may study your books in the future.
Incomplete Entry Error
If a manual entry is made, but only half of the entry was filled out, the trial balance will not balance, making this one of the easiest errors to detect and correct. The beauty of the double entry accounting system is that each amount is recorded in two separate places. This creates a built-in error detection system. To look back at our earlier example, suppose you bought $50 worth of supplies. An incomplete entry would look like debiting $50 to Supplies without subtracting the $50 from Cash by crediting Cash, as follows:
Alternatively, you might subtract the $50 from Cash without recording where the money went:
When an incomplete entry is made, the trial balance will not balance. In order to re-balance the books, the amount missing is either debited or credited to a suspense account. This allows the books to balance while you search for the error. When you discover the error, you can take the amount out of the suspense account, and debit or credit it to the correct amount. If the error is not material in size, or you cannot discover where the missing amount belongs, it can be credited to a miscellaneous expense in order to balance your bookkeeping for the period.
While this is a fairly simple error to find and correct, it is also easily avoidable by using accounting software rather than manual entry. Accounting software such as Automa8e will allow you to automate individual transactions.
Software User Error
Any computer is only as smart as the person using it. Accounting software such as Automa8e goes a long way toward streamlining your work processes. Some errors are easier to catch with the built-in cross-checks than others. Depending on your mistake, the software may show an error message that makes it easier to use the usual amount of caution and precision when making entries to retain accuracy.
Identifying and correcting all these errors will cost you valuable time in your business. Each of these errors can be generally attributed to human error. Automating your day-to-day bookkeeping will eliminate the inaccuracy and frustration associated with these common accounting mistakes. Automa8e offers a unique solution for micro to medium size businesses and their accountants, including income, expense, payable, receivable, and tax functionality. Automa8e strives to make complicated business processes intuitive through automation and artificial intelligence.