Common Accounting Errors Experienced by Businesses in the Philippines
Companies follow a common set of accounting principles to ensure the accuracy of their financial statements and books of accounts. However, many small-and-medium enterprises (SMEs) and large businesses in the Philippines still face several challenges with their accounting processes.
Accountants can inevitably encounter accounting errors as a result of improper recording or failing to encode an entry. Sometimes, a financial transaction may not appear in the books of accounts, the wrong amount is encoded in a specific class or the accountant credited a receivable to the wrong client.
Although some accounting errors are minimal, others may have a significant impact on businesses. But, what are the most common of these problems? And how can you identify such errors? To help you, we enumerate the three most common accounting errors committed by accounting professionals in the Philippines.
What is an Accounting Error?
Investopedia defines an accounting error as a non-fraudulent error in documenting financial records. When spotted, accountants must resolve it quickly. If the error is left unresolved, the company conducts an investigation. While accounting mistakes are accidental, it should not be confused with fraud. Fraud is an intentional act designed to provide an unlawful gain or advantage.
Companies conducting their month-end book closings sometimes discover accounting errors in their books. These instances are common if the accountants are not careful when encoding data in their financial documents. While most errors are resolvable, companies can not settle a material discrepancy unless they conduct an audit trail.
To help you identify accounting discrepancies you might not be familiar with, we will discuss the top causes of an accounting error and provide solutions to help you prevent committing such error.
These errors are as follows:
- Clerical error;
- Compensating error; and
- Error of accounting principle.
An accountant can run across errors during the process of recording transactions if they are not keen on cross-checking the entries they provide in the books of accounts. Such errors are called clerical errors. There are two types of clerical errors: Error of omission and error of commission.
An error of omission happens when the accountant forgets to record the entire financial transaction or a portion of the said data. On the other hand, an error of commission can take place in either journals, subsidiary books or ledgers. It occurs if the accountant posts an incorrect amount or if they place the values in the wrong classes in the books of accounts.
This accounting mistake happens when the accountant computes values incorrectly, resulting in a counterbalance with an error of the same or contrasting nature. This is called a compensating error. According to AccountingTools, this error is difficult to identify when they occur in the same account and reporting period since their net effect in the ledger is nothing.
A compensating error may also appear in other accounts. For example, the trial balance’s sum for total debits and credits are correct, but other account balances are incorrect. There are instances where the accountant creates two or more compensating errors to cancel out the effect of each other.
Error of Accounting Principle
If the accountant records the entry in the wrong account, they violate the principles of accounting, thus, committing the error of accounting principle. Like compensating errors, there can be difficulties in identifying and discovering the discrepancy in this type of error. It takes a while to identify an error of principle since the trial balance only shows whether the debit amount matches the credit amount.
Should a company record an individual’s personal expense as part of the organization’s expenses, it will be violating the economic entity principle. This accounting principle states that company transactions should be separate from those of the owners and other affiliate organizations.
Preventing Accounting Errors
While accounting errors are preventable, these can still happen anytime. Companies should establish special measures to avoid their occurrence during the accounting process.
Accountants should conduct methods such as reconciliation of accounts to consolidate their account balances. When reconciling accounts, Gibson Insurance states the following as benefits of this method:
- Know how much cash or credit the company has;
- Ensure if fraudulent activities did not take place;
- Identify bank errors; and
- Identify the status of customer payments.
Companies must also establish documentation procedures and internal controls to avoid the occurrence of accounting errors. Once these procedures are in place, an accountant must observe the processes and routines while entering information in ledgers, journals, and other books of accounts to prevent accounting mistakes from accumulating.
Another practice an accountant should observe is to review each data before posting them in the books of accounts. Incorrect values in any column can lead to accounting errors which can pile up if ignored. If you make a routine out of these preventive measures, these can benefit your business and mitigate your chances of encountering them in the long run.