138 Accounting: Business Reporting for Decision Making
4.9 Accounting errors
LEARNING OBJECTIVE 4.9 Detect errors in transaction analysis and investigate the
origin of the errors.
Sometimes the asset side of the accounting equation might not balance with the claims side (the
liabilities and equity) of the accounting equation. This could be evident through the preparation of
a worksheet, trial balance or balance sheet, and it could occur for a number of reasons. The main
technique for rectifying the situation is to double-check every transaction entered and ensure that
the duality rules have been followed. The most common errors are single-entry errors, transposition
errors and incorrect entry.
Single-entry error
The concept of duality must be applied to every transaction. If only one effect of the business transaction
is entered, this will cause both sides of the accounting equation to be out of balance. A single-entry
error arises when only one part of a transaction is entered. For example, if a payment of wages of $2000
were recorded only as a decrease in bank, it would cause the asset side to be lower than the claims side.
The correct dual entry would be to:
- decrease cash $2000
- decrease profit or loss $2000 (to record the expense of wages).
Transposition error
A transposition error occurs when two of the digits recorded in the transaction are transposed
(switched). Imagine that office equipment of $8700 is purchased for cash, and $7800 is shown as a
decrease to the cash account but $8700 is mistakenly shown as an increase to the office equipment
account. As we can see, the last two digits have been transposed. This can be identified as a transposition
error because the difference of $900 is divisible by 9.
Here are some further examples.
- A business bought stationery for $541 and recorded it as a decrease of $514 to cash and a decrease of
$541 to profit or loss. The difference is divisible by 9.
- The business banked takings of $3230 and recorded the takings as $3320 income. The difference is
90, and this amount is divisible by 9.
Incorrect entry
Another common error is to incorrectly record a business transaction as two increases (or decreases)
to one side of the equation, or an increase on one side and a decrease on the other. All of these situ-
ations will also cause the equation (and therefore the worksheet) to be out of balance. Here are some
examples.
- The entity records advertising expense $3000 as a decrease to cash and an increase to profit or loss of
$3000. This error will cause the claims side to be $6000 greater than the assets side.
- The entity purchases office equipment for $8000 cash and records the transaction as a decrease to
cash of $8000 and a decrease to office equipment. This will result in the asset side being $16 000 less
than the claims side.- The owner withdraws cash $3500 and records the transaction as an increase in cash of $3500 and a
decrease in equity. The correct entry would be to decrease cash and decrease equity. The result of this
error is that the asset side will be $7000 higher than the claims side.