Types of Errors in Accounting: Examples & Correction

.Types of Errors in Accounting: Complete Guide with Examples & Rectification

Even experienced accountants make mistakes. A misplaced digit, a wrong account, or a forgotten entry can throw your entire books off balance. Understanding the types of accounting errors helps you find and fix them quickly.

Whether you're a Class 11/12 commerce student, ACCA FIA candidate, or business owner, this guide covers every error type with clear examples and step-by-step correction methods.

What Are Errors in Accounting?

Accounting errors are unintentional mistakes made while recording, classifying, or summarising financial transactions. These errors differ from fraud—errors happen by accident, while fraud is deliberate.

Errors can occur at any stage:

• Writing journal entries
• Posting to ledger accounts
• Calculating totals
• Preparing the trial balance

The good news? Most errors leave clues. Once you know what to look for, finding and fixing them becomes straightforward.

Why Do Accounting Errors Matter?

Errors in your books can cause serious problems:

Detecting errors early saves time, money, and reputation. The trial balance is your first line of defence—but not all errors show up there.

Classification of Errors in Accounting

Errors are classified in two main ways:

Based on the Nature of Error

1. Errors of Principle
2. Errors of Omission
3. Errors of Commission
4. Compensating Errors

Based on the Effect on the Trial Balance

1. Errors that affect the Trial Balance (it won't tally)
2. Errors that don't affect the Trial Balance (it still tallies, but the records are wrong)

Let's examine each type in detail.

Types of Errors in Accounting (Detailed Explanation)

1. Errors of Omission

An error of Omission occurs when a transaction is entirely or partially left out of the books.

Complete Omission

The entire transaction is not recorded at all.

Example: Sold goods worth ₹15,000 to Sharma & Co. on credit. The accountant forgot to record this transaction.

Effect: Neither Sales Account nor Sharma & Co. Account shows this transaction. The trial balance still tallies because both debit and credit are missing equally.

Partial Omission

The transaction is recorded in one account but not the other.

Example: Purchased goods worth ₹20,000 from ABC Traders. The accountant debited Purchases Account but forgot to credit ABC Traders Account.

Effect: Trial balance won't tally. The debit side exceeds the credit side by ₹20,000.

2. Errors of Commission

An error of commission occurs when a transaction is recorded, but with the wrong amount or in the wrong account of the same class.

Wrong Amount Recorded

Example: Received ₹5,500 from customer Patel. The accountant recorded it as ₹5,050.

Effect: Both Cash Account and Patel's Account show ₹5,050 instead of ₹5,500. The trial balance tallies, but the amount is incorrect by ₹450.

Wrong Account (Same Class)

Example: Sold goods to Mehta Bros. but credited to Gupta Bros. Account (both are debtors—same class).

Effect: Trial balance tallies. But Mehta Bros. shows lower receivables, and Gupta Bros. shows higher receivables. This is a problem when you try to collect payment.

Calculation Errors

Example: Added a column incorrectly. The total should be ₹45,000 but was written as ₹54,000.

Effect: Trial balance won't tally if the error is on one side only.

Posting to Wrong Side

Example: Sales of ₹10,000 credited correctly to Sales Account but also credited (instead of debited) to CustomerAccount.

Effect: Trial balance won't tally. The credit side exceeds the debit side by ₹20,000 (double the amount).

3. Errors of Principle

An error of principle occurs when a transaction is recorded in the wrong class of account. The accounting principle or rule is violated.

Key Point: The amount is correct. The entry is made. But it goes to the wrong account type.

Capital vs Revenue Error

Example: Purchased machinery for ₹50,000. The accountant debited Repairs Account (expense) instead of Machinery Account (asset).

Effect:

• Assets are understated by ₹50,000
• Expenses are overstated by ₹50,000
• Profit is understated by ₹50,000
• Trial balance still tallies

This is a grave error because it affects both the income statement and balance sheet.

More Examples of Errors of Principle

Why It's Dangerous: The double entry system balances, but the financial statements are misleading. Investors and managers make decisions based on wrong information.

4. Compensating Errors

Compensating errors are two or more errors that cancel each other out. The trial balance tallies, but multiple accounts are wrong.

Example:

• Sales Account was overcredited by ₹1,000
• Purchases Account was overdebited by ₹1,000

The ₹1,000 extra on the credit side (Sales) is cancelled by ₹1,000 extra on the debit side (Purchases). Trial balance tallies perfectly, but both accounts are incorrect.

Another Example:

• Rent paid ₹5,000 recorded as ₹6,000 (Debit side excess ₹1,000)
• Commission received ₹3,000 recorded as ₹4,000 (Credit side excess ₹1,000)

Errors compensate each other—trial balance tallies. But Rent and Commission are overstated.

5. Errors of Duplication

An error of duplication occurs when the same transaction is recorded twice.

Example: Paid ₹12,000 to supplier Verma & Co. The accountant recorded this payment on both March 15 and March 18.

Effect:

• Cash/Bank is understated by ₹12,000 (extra payment shown)
• Verma & Co. Account shows ₹24,000 paid instead of ₹12,000
• Trial balance tallies (both entries complete)
• But Verma & Co. will complain when asked for the "remaining" ₹12,000

6. Errors of Original Entry

An error of original entry occurs when the wrong amount is recorded in the journal (the first record). This wrong amount then flows through to the ledger.

Example: Invoice shows ₹7,650. Accountant writes ₹7,560 in the journal.

Effect: Both debit and credit entries are wrong by the same amount (₹90 less). The trial balance tallies, but the records are understated.

7. Errors of Reversal

An error of reversal occurs when the correct accounts are used, but debits and credits are swapped.

Example: Received ₹8,000 from customer Kapoor.

Effect: Trial balance tallies. But Cash shows ₹16,000 less than actual (₹8,000 wrongly credited + ₹8,000 not debited). Kapoor's Account shows ₹16,000 more receivables than the actual amount.

Summary: Errors and Trial Balance Effect

Key Insight: A balanced trial balance doesn't guarantee error-free books. Many serious errors remain hidden.

How to Detect Errors in Accounting

Step 1: Check the Trial Balance

If the trial balance doesn't tally, start here:

1. Re-add both columns - Simple calculation errors are common
2. Check the difference - The gap gives clues:
   • Difference divisible by 2 = Possible wrong side posting
   • Difference divisible by 9 = Possible transposition error (digits swapped)
3. Compare with previous trial balance - New accounts or unusual balances stand out
4. Verify ledger balances - Recompute each account's closing balance

Step 2: Review Source Documents

Match journal entries against:

• Invoices
• Receipts
• Bank statements
• Contracts

This catches omissions and wrong amounts.

Step 3: Perform Reconciliations

Regular bank reconciliation reveals:

• Unrecorded transactions
• Duplicate entries
• Wrong amounts

Also reconcile:

• Accounts receivable ledger to control account
• Accounts payable ledger to control account
• Inventory records to physical count

Step 4: Use Suspense Account

When you can't find an error immediately, use a suspense account to force the trial balance to tally temporarily. Then investigate and clear it.

Rectification of Errors in Accounting

Once you find an error, you must correct it through rectifying journal entries.

Rectification Examples

Example 1: Error of Omission

Error: Credit sales of ₹12,000 to Patel Traders completely omitted.

Rectification:

Example 2: Error of Commission (Wrong Amount)

Error: Rent paid ₹4,500 recorded as ₹5,400.

Rectification:

Example 3: Error of Principle

Error: Machinery purchased for ₹75,000 debited to Purchases Account.

Rectification:

Example 4: Error of Reversal

Error: Cash received ₹6,000 from Gupta recorded as Cash paid to Gupta.

Rectification:

Example 5: Compensating Errors

Error: Purchases Account overcast by ₹500; Sales Account also overcast by ₹500.

Rectification for Purchases:

Rectification for Sales:

The Suspense Account

When the trial balance doesn't tally and you can't find the error immediately, open a Suspense Account to balance temporarily.

Example: Trial balance shows Debit total ₹4,85,000 and Credit total ₹4,82,000. Difference is ₹3,000.

Temporary Entry:

As you find errors, pass rectifying entries to clear the suspense account.

Important Rules

1. Suspense Account is temporary—clear it before finalising accounts
2. Only errors affecting one side of trial balance go through suspense
3. At year-end, any remaining suspense balance appears on the balance sheet

Preventing Errors in Accounting

1. Use Standardised Procedures - Create checklists for recording transactions
2. Implement Double-Checking - Have a second person review entries
3. Reconcile Regularly - Monthly bank reconciliation
4. Use Accounting Software - See our TallyPrime guide
5. Maintain Source Documents - Keep all invoices and receipts organised
6. Train Your Team - Ensure everyone understands the double entry system
7. Audit Periodically - Internal audits catch errors early

Types of Errors: Exam Tips

For Class 11/12 Students

• Memorise all error types with one example each
• Practice rectification entries—they carry high marks
• Understand when suspense account is needed

For ACCA FIA Candidates

• Focus on computerised error detection
• Understand control account reconciliations
• Practice MCQs on error identification

Quick Memory Trick

O-C-P-C-D-O-R (Oh See, PC Dor)

• Omission
• Commission
• Principle
• Compensating
• Duplication
• Original Entry
• Reversal

How Errors Affect Financial Statements

Understanding depreciation errors is particularly important—they affect both profit and asset values.

FAQs About Types of Errors in Accounting

What are the main types of errors in accounting?

The main types are: errors of omission (transaction not recorded), errors of commission (wrong amount or wrong account of same class), errors of principle (wrong class of account), and compensating errors (multiple errors cancelling each other).

Which errors don't affect the trial balance?

Complete omission, errors of principle, compensating errors, errors of original entry, errors of reversal, and commission errors involving wrong account of same class—all keep the trial balance balanced despite being incorrect.

What is a suspense account?

A suspense account is a temporary account used to balance the trial balance when errors cannot be found immediately. It holds the difference until errors are located and corrected.

How do you rectify errors in accounting?

Errors are rectified by passing correcting journal entries. The method depends on the error type—some need direct correction, others need reversal and re-entry. Errors affecting one side of trial balance go through the suspense account.

What is the difference between error and fraud?

An error is an unintentional mistake made during recording or processing. Fraud is intentional manipulation of records for personal gain. Both affect accuracy, but fraud involves deliberate deception.

How can accounting errors be prevented?

Prevention methods include: using standardised procedures, implementing double-checking, reconciling accounts regularly, using accounting software, maintaining organised source documents, training staff properly, and conducting periodic audits.

What is an error of principle?

An error of principle occurs when a transaction is recorded in the wrong class of account—for example, recording an asset purchase as an expense. The amount is correct, but the account type is wrong.

What is a compensating error?

A compensating error is when two or more errors cancel each other out. The trial balance tallies, but multiple accounts contain incorrect balances.

Why is error detection important?

Error detection ensures accurate financial statements, proper tax calculations, informed business decisions, successful audits, and regulatory compliance. Undetected errors can lead to financial losses and legal problems.

Key Takeaways

1. Not all errors show in trial balance: Many serious errors keep the trial balance balanced while corrupting your records.
2. Know your error types: Omission, Commission, Principle, Compensating, Duplication, Original Entry, and Reversal—each has unique characteristics.
3. Use suspense account wisely: It's a temporary tool, not a permanent solution. Clear it before finalising accounts.
4. Prevention beats correction: Standardised procedures, reconciliations, and software reduce errors significantly.
5. Understand the impact: Errors affect financial statements, tax calculations, and business decisions.
6. Practice rectification entries: For exams and real life, knowing how to correct errors is essential.
7. Check the difference: A trial balance difference divisible by 9 suggests transposition; divisible by 2 suggests wrong-side posting.

Related Topics to Explore

• Double Entry System: Rules & Examples
• Ledger Account: Format & Posting Guide
• Journal Entries: 100+ Examples Guide
• Trial Balance: Format & Preparation
• Bank Reconciliation Statement Guide
• Depreciation Methods with Examples
• Accrual Concept in Accounting
• Current Assets Explained
• Current Liabilities Guide

External Resources

For official guidance on accounting qualifications and professional standards, visit [ACCA Global](https://www.accaglobal.com

✍️ Author Bio

This guide was written by Vijaya Swaminathan, CA, a chartered accountant with 25 years of experience and 15 yearsspecialising in IFRS training and implementation.