Section 1 - Where errors occur and how they are found Flashcards
Annual depreciation was calculated using a useful life of 11 years instead of 9 years.
This is an example of what kind of error?
Use of improper accounting estimate.
An error of estimate occurs when a company estimates the wrong dollar value or uses an incorrect percentage to determine an estimated dollar value. For example, a company generally recognizes bad debt as 3% of credit sales; however, the expense was calculated using 5%.
Your company performed services for a customer on credit. When the sale was recorded, the bookkeeper credited Accounts Receivable.
This is an example of what kind of error?
Posting error.
A posting error occurs when an amount is posted to the correct account but on the wrong side of the ledger (debit vs. credit)
PerryCo forgot to record annual interest Expense.
This is an example of what kind of error?
An accrual error.
The expense has been incurred, however, it was not recorded on the company’s books. This is an omission of an accrued expense.
How are most errors prevented?
Basic double-entry bookkeeping and Internal Controls.
At the heart of accounting, double-entry bookkeeping helps prevent errors, ensuring the sum of all debits equals the sum of all credits, keeping the equation in balance at all times. Depending on the nature of the transaction, more than two accounts may be affected, (e.g., a company purchases an asset and makes a down payment in cash and puts the balance on credit or a company pays for various expenses with one check) however, a minimum of two accounts are affected in every transaction.
Another way companies prevent and discover errors are internal controls. Internal controls are policies or procedures put in place by a company to ensure the integrity of financial and accounting information, achieve operational and profitability targets, and communicate management’s policies throughout the organization. Internal controls help assure the reliability of accounting information through routine procedures such as bank reconciliations, and preparation of trial balances; however, for any company, even one with the best internal controls in place, it is impossible to prevent all errors. Therefore, realistically, no accounting system can ever be error free.
What is a transposition error?
A transposition error is an error of data entry and is most common when transactions are entered manually using data referenced from another source. When a transposition error occurs, two digits, either individual or part of a larger sequence of numbers has been reversed.
Example: A company received a bill for $93; however, the expense is recorded for $39, or an asset is purchased for $2,276 but is recorded for $2,726,
When an error occurs, accounting personnel responsible for correcting the error must do these 3 things after finding the error.
- Identify the amount of the error
- Identify which accounts were affected
- Determine in which period the error was made (current period or prior period?)
At year-end, no adjusting entry was recorded for depreciation.
This is an example of which kind of error?
Omission
By definition, to omit is the failure or neglect to do something. Omission errors are as a result of an action not taken. Simply stated, errors of omission occur when a transaction that should have been accounted for, has not been recorded in the books. Failure to record a bill for an expense incurred or the revenue earned from the sale of a product are both examples. Transactions that have been omitted are often difficult to detect and not revealed by the TB; therefore, it is best for companies to employ a solid routine for recording transactions in a timely fashion.
A company records a payment of $6,900 as $9,600
This is an example of what kind of error?
Transposition error.
A transposition error is an error of data entry and is most common when transactions are entered manually using data referenced from another source. When a transposition error occurs, two digits, either individual or part of a larger sequence of numbers has been reversed.
If an error was discovered after the books have been closed, how is the error corrected?
If an error was discovered after the books have been closed, and the error affected the Prior year’s Revenue and/or expense account, a Prior Period Adjustment to Retained Earnings or Owner’s Capital is required depending on where the net income or loss was transferred when the books were closed.
What is an error of omission?
Omission errors are as a result of an action not taken.
Simply stated, errors of omission occur when a transaction that should have been recorded, was not accounted for on the books. Failure to record an expense transaction or the sale of a product are both examples.
On August 1, a $1,800 check was paid for a 12-month Insurance premium and was debited to Prepaid Insurance. On December 31st, the adjusting entry recognized Insurance expense of $450.
This is an example of which kind of error?
Deferral Error
In this case, too little Insurance Expense was recognized and too much was deferred. Insurance expense should have been recognized for $750, as opposed to $450.
$1,800 premium for 12 month policy = $150 per month x 5 months (Aug-Dec) = $750
When an external auditor comes in to examine the data reported on the financial statements and requires corrections of any accounting errors to assure the financials are fairly presented, this is a _______.
Year-end financial audit.
What is an accrual/deferral error?
Accrual and Deferral errors occur when:
- The company fails to record the accrual or deferral (Omission)
- The company understates the Accrual or Deferral (Records too little)
- The company overstates the Accrual or Deferral (Records too much)
What is a slide error?
An accounting slide is an error that results in a miscalculation as the decimal point of a figure is moved to the left or right of its correct position. Simply stated, a zero was added or removed.
Example: A bookkeeper or accounting personnel recorded $17,250.00 in the cash account, instead of $1,725.00, or $890.25 in the insurance expense account instead of $8,902.50.
How often should the bank reconciliation be performed?
A bank reconciliation should be performed monthly when the bank statement is received.
