How do accounting errors occur? What are examples of errors

How do accounting errors occur?

- Errors are more common in small businesses that have less personnel, and therefore less internal controls due to a lower number of employees. Errors often occur because accounting personnel are doing too many things at once, are going too fast, or even simply do not understand what they are doing. The individual may be an accountant who lacks experience and just is not familiar yet with their work, and is prone to making many errors. With less people, there are fewer individuals to double-check work of the other employees, so errors often go undetected.

What are examples of errors you have encountered at your place of employment (if you are aware of any)?

- It is a common error for expense accounts to not be adjusted at the end of the year for prepaid expenses. Many companies prepay their insurance or rent expense for the entire year, and then adjust the accounts accordingly at the end of each month. The adjustment is often erroneously omitted from being made at the end of each respective month.

Why is it necessary to correct them?

- If errors such as the one above are not corrected, the financial statements will be inaccurate. In the above case, it would show a higher amount in assets that should be reported, and a higher net income (because of understated expenses) that should be reported.

What are the ramifications of not correcting errors?

- Ramifications include producing inaccurate financial statements, which leads to additional problems because lenders, investors, and other users of the company's financial statements base their investing, lending, and other financial decisions off of the information contained in the financial statements.

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