Don’t panic! What to do after making an accounting error

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Accounting errors are genuine mistakes that were not made intentionally. It is possible to have discrepancies in the numbers, or you may have used an incorrect interpretation of policy, resulting in a mishap.

Although accounting errors can lead to serious problems, including criminal investigation, genuine mistakes can usually be rectified quite easily.

GAAP

Generally Accepted Accounting Principles (GAAP) is a set of procedures, standards and ethics to be used by companies when compiling financial statements. The principles should be followed to simplify the reporting and recording of financial information, minimising errors. Financial statements should be prepared using GAAP, although it is still possible to slip up.

Types of mistakes

Errors of omission occur when a transaction has not been recorded at all in the books. If the deal hasn’t been recorded, it is a complete omission, but if some of the details have been noted, it will be known as a partial omission.

An error of commission is when an incorrect amount has been recorded or if the entry has been made incorrectly. Meanwhile, compensating mistakes occur when two errors have been made that compensate each other. The two errors are made independently, but the figures entered compensate, in complete coincidence.

How to rectify accounting errors

Accounts are prepared to give an accurate indication of the fiscal position of a company, usually by outsourcing finance tasks to an accountant. It is possible to enter transactions incorrectly in the financial records, or even omit them completely, which will have an effect on the final figures. Before preparation of the final accounts, it is crucial to locate and amend any mistakes, if possible.

Errors of principle are made when an entry is recorded incorrectly. For instance, a record that should be down as capital allowances is noted by mistake as an expense. This should be rectified by making a correcting entry, and there are two ways to do so.

The first is to make an entry that will reverse the original error, before then making another to correctly record the transaction. To reverse the first mistake, enter the amount as a credit under capital allowances and as a debit under expenses. To fix the error, you could also make a single entry that will compensate for the original slip up. However, to make a correcting entry, you need to know what the figure should have been originally and the amount that has been entered incorrectly.

For assistance with the correction of accounting errors, contact us today.