3. Types of Error in Accounting

Question 1

Give the five types of error in an accounting system.

Answer 1

1. Transposition errors
2. Errors of omission
3. Errors of principle
4. Errors of commission
5. Compensating errors

Question 2

What is a transposition error?

Answer 2

A transposition error is when two digits in an amount are accidentally recorded the wrong way round.

E.g. a sale of £684 recorded as a sale of £648.

Question 3

What is an omission error?

Answer 3

An omission error is a failure to record a transaction at all.

A business receives an invoice from a supplier for £250, and the transaction is omitted from the accounting records. As a result, both total debits and credits will be wrong by £250.

Question 4

What is an error of principle?

Answer 4

An error of principle could be positing a double entry in the belief that the transaction is being entered in the correct accounts, but subsequently finding out that the accounting entry breaks the ‘rules’ of an accounting principle or concept. A typical example of such an error is to treat revenue expenditure incorrectly as capital expenditure.

Question 5

What is an error of commission?

Answer 5

An error of commission is when a mistake is made in recording transactions in the ledger accounts by recording a debit entry or a credit entry in the wrong account.

Telephone expenses of £540 are debited to the electricity expense account, an error of commission. Although total debits and credits balance, telephone expenses are understated by £540 and electricity expense is overstated by the same amount.

Question 6

What is a compensating error?

Answer 6

Compensating errors are errors which are, coincidentally, equal and opposite to one another.

Compensating errors hide trial balance errors.