An error of commission
An error of commission occurs when a transaction has been posted to the wrong account of the same ‘type’. Examples of type of account are expense, asset, income or liability. For example, a rent payment and telephone account are both expense accounts and are, therefore, of the same ‘type’. If the rent payment is posted to the telephone account, the trial balance will agree but the rent and telephone balances will be incorrect.
Example:
Travel costs of £360 are posted to the telephone account by mistake.
An error of principle
An error of principle occurs when a transaction has been posted to an account of a different ‘type’. An example is when an expense is posted into an asset account by mistake, such as the purchase of fuel (an expense) for a vehicle posted to the vehicle (asset) account. This transaction is not an asset transaction, and should be posted to the vehicle expenses account. The trial balance will agree but the vehicle expense and asset balances will be incorrect.
Example:
A printer cartridge costing £24 is posted to the office equipment account.
An error of omission
An error of omission occurs when something is ‘omitted’ – left out or simply not posted to the accounts. For example, a manager of a business sends an invoice to a customer but forgets to send it to the finance department to be recorded in the accounts. Therefore, it has been omitted.
Example:
A purchase invoice received is not recorded in the accounts.
Reversal of entries
Reversal of entries occurs when equal debits and credits are posted, but to the wrong sides of the accounts. For example, if a £500 advertising bill is paid, but £500 is credited to advertising and £500 debited to the bank, this is the wrong way round. To correct the error, it is removed and the correct entry is posted: £500 is debited to advertising and £500 is credited to the bank twice. It is best to reverse the incorrect entry first, then post the correct version, to make sure you remove the incorrect entry properly.
Example:
Purchase returns are debited to the purchase returns account and credited to the payables control account.
Transposition errors
Transposition errors occur when two consecutive numbers are swapped around in error. For example, the transaction is for £78 but you post £87. If both the debit and credit are posted in this way then the trial balance will still balance. An example of this is if you sell goods for cash of £74, but then debit cash with £47 and credit sales with £47. The trial balance will still balance, but both sales and cash balances are incorrect.
Example:
A cash transaction for £32 for envelopes is posted as £23 credit to the cash account and £23 debited to the stationery account.
Compensating errors
A compensating error occurs when there are two or more errors that by chance cancel each other out. As a result, the trial balance will still balance but the relevant account balances will be incorrect. For example, you receive £400 for a transaction but debit the bank £600 (so £200 is debited in excess). You then post an advertising invoice for £400 but credit the bank £600 (so £200 is credited in excess). The trial balance will balance, because the debit errors are both for £200 and cancel each other.
Example:
The purchases entry (debit) is understated by £600. A credit entry to sales is understated by £600.
You should now be familiar with the different types of errors that might occur which are not revealed by the trial balance.
Remember that posting too much to an account is known as ‘overstated’ and posting too little is known as ‘understated’.