A good bookkeeper will try to ensure that errors are not made in a business’ books and will seek to implement procedures to reduce the risk that they might occur. Despite this, mistakes will still be made even in the best of businesses and a bookkeeper must be able to correct them when they are found.
How are errors found?
Errors can be found by accident but a bookkeeper should not simply rely on good fortune. Instead regular checks, such as those mentioned below, should be made to help ensure that the books and ledgers accurately reflect the transactions that have taken place.
- The reconciliation of control accounts to other evidence such as subsidiary ledgers, cash counts and bank statements
- Checking the supplier statements of account against the balances in the purchases ledger and investigating discrepancies
- Checking the balances in the sales ledger to the amounts received from customers and investigating any differences or disagreements with customers
- Checking ledger balances to identify any that are unusually large or small in order to identify any that should be investigated
- Checking that the totals of the debit and credit columns of the trial balance add up to the same amount
Audits involve checking the systems and procedures used by a business to ensure that they are well designed and are working as intended. Auditors (i.e. those individuals who carry out an audit) will give their opinions as to whether the business’ accounts are accurate and truthful.
There are two types of auditor, internal and external. An internal auditor is an employee of the business being audited, whilst an external auditor is not an employee but works for an independent firm of auditors.
When an error is identified a bookkeeper should correct it. They should not however, strike-out, or obliterate, the original error as doing so can cause problems. First, another employee might have relied on the original (incorrect) figures and if the error simply disappears it can cause confusion. Secondly, if changes to the books can be made without there being a record of these changes it increases the risk fraud could take place.
Instead, a bookkeeper will correct the error using one or more journals to remove the effect of the original entries and correct the records.
Types of error
Bookkeepers split errors into two broad types:
- Errors that are not disclosed by the trial balance (which will be examined in this section); and
- Errors that are disclosed by the trial balance (which will be examined in section 5 of this course)
Errors that are not disclosed by the trial balance
These are errors that do not result in a difference between the total of the debit column of the trial balance and the total of the credit column.
Types of errors not disclosed by the trial balance:
- Error of omission
- Error of commission
- Error of principle
- Reversal of entries error
- Error of original entry
- Compensating errors
In the rest of this section we shall look at these types of errors, what they are and how they are corrected.