Typical accounting errors businesses make and how to resolve them

Striking the balance

Whether you manage your accounts software in-house or outsource to an accountancy firm, it goes without saying that your balance sheet should, erm, balance.

Keeping your balance maintained will give an overview of your business’s credit and debit position and identify any accounting errors that may have been made.

Unfortunately, the only solution in this instance is to go through every invoice and transaction to identify an error. This could be spotted during the reconciliation process, and often the mistake will be man-made – errors of omission, commission, or transposition are more common than you might think.

Updating entries, with a side note outlining the date and nature of the error, are often enough to get your accounting back on track with the necessary due diligence.

The accounting hall of shame

Incorrect data entry can often lead to errors in invoicing, and through the years, there have been some rather eyebrow-raising examples of this in action. Even major organizations are not immune to such mistakes – Santander Bank once made payments of a staggering $175 million in error after their internal system duplicated more than 75,000 scheduled transfers.

Common examples of such mistakes include subsidiary errors (where payment data is entered incorrectly, such as an invoice for $1000 being entered as $10), transposition error (where the digits of a payment are reversed by mistake), error of omission (when a payment, either a credit or a debit, goes unrecorded) and error of commission (when the correct amount is added or subtracted erroneously in the ledger).

Even in this digitalized world, there are still times when a physical paper trail is necessary, which needs to be managed with an appropriate filing system. It only takes the odd invoice or receipt to go ‘missing’ to unbalance your accounts completely, and if the document in question has been thrown in the trash, then you will have a hard time reconciling your spreadsheets no matter how advanced the software you use is.

Indeed, in a recent joint report by Pay.UK and the Chartered Institute of Credit Management (CICM), over half of Britain’s small and medium-sized enterprises (SMEs) have suffered from late or missing payments in recent years, amounting to £17.5bn. A lot of this can be attributed to overdue invoices taking too long to be settled.

How to amend accounting errors

As soon as an anomaly in your accounts is spotted, you must do everything you can to identify the mistake as quickly as possible. That way, you can rectify the situation and sleep much easier at night.

If the error is specifically in your accounting, you can add notes to your various spreadsheets and documents that detail the mistake, the steps taken to address it, and the time/date that the issue was corrected.

In other scenarios, you may need to take further steps. For example, suppose you have underpaid an invoice to a supplier or contractor. In that case, you can raise a credit note that will ensure the wronged party gets paid the correct amount and that your company has a paper trail for its accounts outlining the situation.

You can also issue a credit note to a client/buyer if their product or work rendered develops a fault, in which case the situation can be rectified without the need for reparations to be made out of your cash budget.

Sometimes errors can be found when comparing budgets to actual costs, as unforeseen problems such as supply chain issues can affect whether a transaction is costed correctly or not. Comparing the two documents can often unveil the accounting mistake.

Utilizing accounting software will minimize the risk of errors in your financial reporting but remember that these systems are only as good as the individuals inputting the data. Ensure that your accountancy team (or yourself if you are a sole trader or SME) is well trained and given the time to do their job correctly.