Monthly Archives: April 2023

Types of Errors in Accounting

An error in accounting is a non-fraudulent error in double-entry bookkeeping transactions. In most cases, errors occur because the bookkeeper either lacks accounting expertise or is careless.

The moment an error is spotted, investigative measures should be taken and corrections made. Errors that are allowed to persist in the ledgers can compound over time and create massive headaches to find and correct later.

Unlike an accounting error, accounting fraud is a deliberate falsification or misrepresentation of the financial affairs of the entity. Don’t get the two mixed up. Errors simply need to be corrected. Fraud should be prosecuted.

Some errors can be identified quickly while others take time. You can spot the easy errors when the debits do not equal the credits in the trial balance. The harder errors to identify do not affect the trial balance. Detecting these errors requires investigative expertise. Until you can find and correct the source of the error, you should show the trial balance discrepancy in a temporary suspense account.

The errors described below are typical in bookkeeping.

Accounting errors affecting the trial balance

As mentioned above, errors that throw the trial balance out of balance are relatively easy to find. The following two types of errors are common when the ledger accounts do not balance.

• Error of omission: Leaving out part of a double-entry transaction creates an imbalance in the trial balance. For example, the bookkeeper enters a debit in one account without entering an offsetting credit in another account.
• Error of commission: Recording unmatched values in offsetting credits and debits or entering two credits or debits instead of one credit and an offsetting debit are two types of errors of commission. For instance, the bookkeeper may have entered $421 as a credit but mistyped $412 as the offsetting debit. Or the bookkeeper entered $500 as a credit to one account and then mistakenly entered $500 in the credit column rather than the debit column of another account.

Definition

Companies have two options for acquiring assets: using its own capital, or borrowing funds from a third party. The balance between assets owned and borrowed has implications for the company’s financial future and level of risk. It is worth becoming familiar with an important accounting technique that simplifies this process: the debt to asset ratio.

The debt to asset ratio is a leverage ratio that identifies the portion of assets that are funded through debt. It is extremely useful for analyzing financial risk. A company that owns more of its holdings is in a more secure position than a company that is overleveraged.  The riskier company would have a higher debt to asset ratio, which signals to analysts, investors, and creditors that the company  may become illiquid or no longer be able to pay its liabilities.

Accountants calculate the debt to asset ratio to inform management, analysts, creditors, and investors alike. It provides a useful overview of how a company has grown and acquired its holdings over its life, as well as a forecast of its solvency in the future. Creditors reference the debt to asset ratio to assess the amount of liability in a business, whether a business can repay those debts, and whether the business will receive additional loans. On the other hand, investors use the debt to asset ratio to ensure that a company is solvent and able to generate a return on investments.  Business owners that want to expand their financing options, rather than be skipped over by wary investors and creditors, would benefit from understanding the debt to asset ratio and why it is such a crucial step in the accounting process.

How to Calculate Debt to Asset Ratio

The debt to asset ratio is relatively easy to calculate. We simply divide total liabilities by the company’s total assets. For example, suppose we own a company that has total holdings of $101,000 and total liabilities of $16,000.  Using the formula, we simply divide $16,000 by $101,000.  The ratio of Debt to assets is 1584 or 15.84%.

Definition

Accounting is about hard numbers, but human errors naturally occur from time to time. If you own a business, you may wonder how accountants handle these errors and accurately balance your books despite them. Often, the bookkeeper can simply scan the books for the culprit and correct the problem. When they can’t identify the error, they rely on a tool called the suspense account. You will likely see a suspense account come up on your business’s Trial Balance, so it is worth understanding how it functions to help balance your books and secure your bottom line.

A suspense account is used to address errors and uncertainties in the ledger. When adding up the Trial Balance, your bookkeeper may notice inconsistencies that prevent the columns from balancing. They will then insert a suspense account, which records and temporarily stores these discrepancies. Once the accountant identifies the problematic transaction, they can transfer that entry out of the suspense account and into the appropriate account. In doing so, the accountant resolves the error and is able to balance your books. This process is known as “zeroing” the suspense account, and should be performed on a regular basis. Note that a suspense account most commonly takes the form of a current asset or current liability. A suspense account can also take the form of a credit or a debit, depending on what is needed to even out the Trial Balance.

When to Use Suspense Account

The Suspense account is like a messy kitchen drawer. Accountants use it to store transactions when they are not sure what to do with them – temporarily, of course, because these errors must be resolved in order to balance the books. There are several types of errors in accounting that prevent balanced books and which necessitate the insertion of a suspense account.

• Part omission (i.e. transaction is only partially recorded)
• Part original entry (e.g. one account is debited for $78 and other is credit for $87)
• Repetitive entries in debit or credit
• Uneven Trial Balance

A business rests on its financial structure. Success requires sound management of finances, expert analysis, and informed strategy. Most people know this process has something to do with the fields of bookkeeping and accounting, but tend to incorrectly use the two terms interchangeably. Bookkeeping is really one function of accounting, while accounting encompasses many functions involved in overseeing a business’s finances. We listed the fundamentals of bookkeeping for startups that will assist you to build a stronger foundation for your company.

Let’s begin by looking at what bookkeeping even means. Bookkeeping is the field within accounting that encompasses everything related to how you record and organize all information pertaining to your finances: that means every transaction, tax form, bank statement, etc. The bookkeeper’s work moves on to the accountant, who prepares reports and other types of analysis tailored to boost your business. Your brainchild depends on the management of your books, so it is essential to do them correctly. Accurate numbers will equip you with reliable financial records, enable you to file taxes without any speed bumps, analyze finances, and develop a winning strategy.

Introduction to Debits and Credits

There are two basic accounting terms that you should learn in order to become proficient in bookkeeping for startups: debit and credit. These terms frequently appear on bank records. Debit simply denotes the left-hand side of a journal or ledger, and credit denotes the right-hand side. Any preconceived association with these words, which are often mentioned in connection with credit cards and accounts, should be forgotten. When doing your books, you have to stick to a few essential principles about debits and credits on financial statements. In order for a double-entry bookkeeping system to remain in balance, the total of debits must be equal to the total of credits. Dividends, Expenses, and Assets should increase with debits and Liabilities, Equity, and Revenue should rise with credits.

Journal and Ledger Basics

Your business will require a precise and consistent picture of every transaction to achieve success in business. That’s why you will need a system to organize every receipt, bill, invoice, and payment. When tracking your business’s dealings, you will need a trusted sidekick: this is a financial statement called the journal, and it creates a chronological list of every financial event that your business encounters.

Journal entries include important information about transactions, including the date, the names of any accounts affected, and the amount moved to each account. Note that it is standard to address accounts that are debited before accounts that are credited. The sample financial statement below contains two journal entries: one for the purchase of furniture, and the other for rent and insurance.