Find Those Frustrating Number Mistakes!
How To Find Mistakes In Your Accounting Records
We all make mistakes when it comes to accounting numbers (and in everyday life too!), but how can you find those mistakes? There are some simple rules to help you potentially save some time finding those mistakes. If you know them, it may help keep you from pulling your hair out!
First, before looking at the tricks, try to see what type of an error it is. There are generally three (3) types: Errors in accounting principle; Errors of Omission; and finally Errors of Commission.
Errors in accounting principle means you put the money in the wrong place. For example, it should be an asset or liability, but you expensed it or put it under sales. This error can only be corrected by knowing accounting, so I will not touch on this.
Errors in Omission means you forgot to put some expense or transaction into your accounting records. These will typically be found by reconciling your bank account(s). Non-bank items, mainly depreciation, amortization, or inventory adjustments must be done outside the “money” system, so a note or reminder must be made.
Lastly, is Errors of Commission. These are transactions that were just entered wrong. For example, you put in $100 when it should be $1000; or combining two numbers to make it one transaction results in a math error; or the amount was debited when it should be credited to the account. Also, at times an error is fixed with another transaction that is wrong too which are very hard to find, but the most common one is transposition of numbers. This means that you entered 65 when it should have been 56; or 182 when it should have been 128.
As stated above, errors of omission are caught in your bank reconciliation(s). If you forgot you wrote a check or forgot to enter a deposit, the reconciliation will aid you in finding the reason that the bank and accounting system do not match. Granted that if you forgot to enter a check and it has not been returned to your bank, the account will balance…until it is returned the following month. The opposite may be true if you make a deposit on the 31st of the month, but the bank dates it the 1st of the next month. The reconciliation will catch 99% of these types of errors.
The most difficult is the error of commission. It is corrected by following a procedure of elimination. Typically, follow these steps to aid in recovery:
See if the number is transposed: 69 not 96. To check this, subtract the difference between the two numbers/answers that you have. If the answer is 9 or a multiple of 9, you have most likely transposed a number. The difference between 12 and 21, 23 and 32, 45 and 54, or 67 and 76 are all 9. When larger variations are involved, see it the answer is divisible by 9. For example, 657 and 576 difference is 81. By dividing 81 by 9, the answer will be 9 and you may begin looking more carefully at your numbers for the inverted numerals. All inverted numbers, assuming it is inverted and not just plain wrong, will be divisible by the number 9.
The next approach is to subtract the difference between sets of numbers and divide by 2. If a debit is in the credit column /account, or vice versa, then the incorrect numbers will double the error. Therefore, if the difference happens to be $500, then dividing by 2 gives you $250. Begin searching for the $250 amount in your transactions and see if it was misposted.
Along with #2 above, if you use QuickBooks, be careful of Journal Entries. This is often a quick way to correct errors, but often leads to other troubles. Unless you are very familiar with debits/credits, reversing the entries happens and makes your books incorrect. It happens all the time and even CPA’s do it occasionally. No one is exempt! BUT if you do use Journal entries and you do not balance, check to verify that you do have the debits/credits in the correct column.
If no answer seems to be found to the error and you are in a hurry, create a Suspense Account and put the offending amount in it. This way, you can go back at a later time and revisit it to see what happened. It will be separated from all the other accounts as a reminder to you to come back to it to see what happened.
Go back and re-add the columns, but start at the bottom and work to the top. This will force you to relook at the numbers. Often adding up the same direction will cause you to make the same error again.
Lastly, if you know the error is in an expense that was probably put into the wrong expense account, but you do not know where you put it, then the error could be left alone since it will not affect the net profit, though I would not advise it always. An immaterial error simply makes one account slightly higher and the other slightly lower, does not change your tax return, and does not justify a large amount of time spent looking for it. Based on your business, you need to justify that amount. If your sales are $50,000 a year, the number would be different than if your sales were $500,000 a year. The first may allow a $5 error, where the second may allow a $50, or even a $50 vs. $500 error.
If it is year end and you still have no idea of the number in the Suspense Account, put it to Miscellaneous Expense with a note stating that it is an error that you cannot find. At that point, your CPA can look for it or it can be put on your taxes as a Miscellaneous Expense with the hope that the IRS does not question it, which it typically will not unless the number is substantial, but a substantial amount should always be found and corrected.
John W. Day, MBA. Theme: Detecting Accounting Errors. http://www.reallifeaccounting.com/pubs/Article_Theme_Detecting_Accounting_Errors.pdf. August 27, 2012.
Hub Pages. Errors in Accounting. http://dilipchandra12.hubpages.com/hub/Errors-in-Accounting. August 27, 2012.
South-Western, Cengage Learning. 2009. Student Handbook for Finding and Correcting Errors. http://academic.cengage.com/resource_uploads/downloads/0538447052_173991.pdf. August 27, 2012.