The 7 most common accounting errors (with examples) — and how to prevent them

The accounting industry is built on accuracy. Yet despite the importance of precision and diligence, accounting errors are surprisingly common. According to a recent Gartner survey, 18% of accountants make financial errors at least daily. Almost two-thirds (59%) make multiple errors per month. 

While errors occur in any profession, they are uniquely risky in accounting. The smallest mistake can impact a business’s regulatory compliance and financial reporting. In extreme cases, it could change the course of a business’s future. 

In this article, we’ll explore seven of the most common accounting errors. More importantly, we’ll outline some strategies you can implement to rectify these errors — or better still, prevent them from happening in the first place. 

The 7 most common accounting errors 

Read on to explore seven of the most common accounting errors, including examples and strategies for prevention.

1. Data entry errors

Data entry is one of the most obvious and common sources of accounting errors — especially when performed manually. Humans have a data entry accuracy rate of 96-99%. Compare that with automated systems, which are accurate up to 99.99% of the time. 

Potential impact

When performing manual data entry, the smallest slip of a finger can result in a missed decimal place or incorrect numbers. While this might sound innocuous, discrepancies can lead to all sorts of issues, including:

• Inaccurate financial records
• Ineffective financial reporting
• Misguided decision-making
• Non-compliance with tax and reporting obligations

To put it bluntly, data entry errors can undermine your entire business. 

Example

A member of your team accidentally enters $50,000 instead of $5,000 into a sales ledger. This affects your company’s income statement and balance sheet, making it appear that your company is bringing in more revenue than it actually is. 

As a result, any decisions you make based on this skewed data — such as budget increases, price reductions, or staff bonuses — could be misguided at best. 

Prevention strategies

With the technology available to accounting practices, manual data entry should be a thing of the past. Not only is it highly error-prone, but it also wastes valuable time and resources. We recommend adopting modern accounting software that automates data entry. Bonus points for platforms that have built-in validation rules to help catch errors before they’re processed. 

2. Misclassification errors

Misclassification errors occur when financial data — such as transactions or expenses — are categorized incorrectly. This could involve an accountant: 

• Recording a personal expense as a business expense
• Classifying operating expenses (OpEx) as capital expenditures (CapEx)
• Placing liabilities in the shareholder equity section of the balance sheet

Potential impact

Misclassification can have a major impact on the accuracy of financial records. Like other types of data entry errors, misclassifying transactions can lead to:

• Inaccurate profit and loss statements, balance sheets, and cash flow projections
• Misleading financial ratios
• Misinformed business decisions
• Potential compliance issues

Misclassifications may be identified by external auditors as potentially fraudulent. For example, if an accountant records a business expense as a sale, it looks suspicious.

Example 

An accountant accidentally records a loan repayment as an expense instead of reducing a liability. This artificially inflates the business’s expenses, leading it to underreport its net income. 

Prevention strategies

To be blunt, misclassification errors shouldn’t happen. Nevertheless, they still do. The best way to avoid classification errors is to establish clear procedures and policies. 

You can establish a detailed chart of accounts that everyone can follow. You can also provide ongoing training to ensure that staff understand the proper classifications of different transactions. 

As always, tech has a major role to play in avoiding this kind of error. Modern accounting software comes with built-in classification guidelines that can help prevent errors. In many cases, software can automate the categorization of transactions and expenses based on preset rules. 

3. Errors of omission

As the name suggests, errors of omission occur when an accountant fails to record a transaction altogether. This can happen due to oversight or negligence — especially when accountants are stretched thin during busy times. 

Potential impact 

Unrecorded transactions can distort financial data significantly. If errors of omission go undetected, they can lead to inaccurate financial reporting. As a result, business leaders will make decisions and form strategies based on unsound data. 

More broadly, failing to record transactions can lead to all sorts of legal and regulatory issues. Your business may be investigated for accounting fraud or fined a large sum of money, even if the omission was unintentional. This can damage your business reputation. 

Example

An accountant fails to record an invoice amount owed to a supplier in the accounts receivable ledger. As a result, your financial statements show that you owe less money than you actually owe. This impacts cash flow, giving the impression that your business has more money than it has. 

Prevention strategies

Errors of omission can be avoided by implementing accounting best practices, such as establishing clear procedures and responsibilities and recording transactions in a timely manner. If an error has occurred, you can detect it promptly by performing regular account reconciliations.

As always, technology can help avoid omission errors. Using accounting software, you can automate the process of recording transactions. Some audit software even has built-in anomaly detection that uses artificial intelligence (AI) and machine learning (ML) to spot irregularities. 

4. Calculation errors

This type of error occurs when an accountant makes an incorrect calculation of financial data. For example, an accountant may manually add up items when creating an invoice, arriving at an inaccurate total. Calculation errors can also occur in spreadsheets when the wrong formulas are used to automatically calculate or find values.

Potential impact

Like other error types on this list, calculation errors can lead to incorrect financial data, which can lead to inaccurate reporting and decision-making. If calculation errors are made on invoices, you may end up charging a client the wrong amount. 

Example

An accountant manually creates an invoice. They accidentally enter $299 instead of $29.99 for a service item. This results in an inaccurate total — and your business overcharging the client. If the client spots this error, it could damage your relationship with them beyond repair. 

Prevention strategies

In this day and age, accountants shouldn’t be manually calculating totals. With a plethora of automation tools at their disposal, calculations should happen accurately and in an instant. Practice management software can also help by automating invoicing. 

If you are still using spreadsheets, make sure that you’ve set up the correct formulas to automatically calculate values based on preset rules. 

5. Principle errors

Most of the error types on this list are a result of simple mistakes or oversight. Principle errors are different, however, as they stem from a misunderstanding of how accounting principles should be applied. As a result, accountants may apply the wrong accounting treatment to a transaction. 

Principle errors can occur when an accountant fails to apply relevant accounting principles and standards, such as the Generally Accepted Accounting Principles (GAAP) or the International Financial Reporting Standards (IFRS). Alternatively, principle errors can also occur when an accountant fails to adhere to internal accounting controls. 

Potential impact

Depending on how widespread they are, principle errors lead to fundamental inaccuracies in financial reporting. They distort financial statements, potentially inflating assets or underreporting expenses. The result is misleading financial insights and poor decisions. 

More than that, however, principle errors represent a more pressing issue. Unlike the other error categories on this list, principle errors suggest a lack of accounting knowledge — the amounts may be right, but how they were arrived at and where they were recorded may be wrong.  

Example

An accountant records the purchase of office supplies as a fixed asset instead of an operating expense. As a result, the company’s asset value is incorrectly inflated on the balance sheet. This misclassification also delays the recognition of the expense, which impacts the company’s profit and loss statement. 

Prevention strategies

Provide comprehensive training on accounting principles and the correct application of financial reporting standards. This is particularly important for junior accountants. You should also establish clear guidelines and review processes for complex or unusual transactions. You can also help catch principle errors by conducting regular internal audits.

6. Duplicate errors

Duplicate errors occur when a transaction is recorded more than once. This can happen for a number of reasons, including: 

• Manual input errors
• A lack of communication between accountants
• Accounting software issues or glitches

Potential impact

Duplicate errors can have a wide-ranging impact depending on the type of transaction or data that was duplicated. For example:

• If financial data is duplicated, it results in inaccurate income or expenses
• If a purchase order is duplicated, you can end up paying for services or goods you don’t need 
• If payroll data is duplicated, you could accidentally pay someone twice

Example

Due to a lack of clear communication and transparency, two accountants enter the same supplier invoice. As a result, the business’s expenses are overstated significantly. If this error goes undetected, the business will pay the same invoice twice.

Prevention strategies

Implement accounting software to automate the recording of financial transactions, payroll processing, invoice generation, and any other accounting function. Look for software that automatically spots and flags duplicate entries to reduce the risk. 

7. Incorrect reconciliation

When done properly and regularly, account reconciliation helps spot discrepancies between your books and external records, such as bank statements, credit card statements, and vendor invoices. Failing to correctly reconcile your accounts — or not reconciling them regularly enough — can lead to all sorts of accounting issues. 

Potential impact

Inaccurate or irregular account reconciliation can result in: 

• Undetected fraud
• Cash flow discrepancies 
• Overstated or understated account balances

Example

An accountant forgets to match a $1,500 payment recorded in the general ledger with the corresponding bank transaction. As a result, they don’t realize that the amount has been entered incorrectly, leading to inaccurate cash flow calculations.

Prevention strategies

Conduct regular and thorough account reconciliations — ideally on a monthly basis as part of the month-end close process. Leverage modern accounting software to automate the process, before performing a manual review to ensure consistency and accuracy. 

How to rectify accounting errors

While the best approach is to avoid accounting errors altogether, some mistakes will inevitably occur in the day-to-day busyness of accounting work. In this section, we’ll highlight strategies and tools you can implement to detect and correct accounting errors quickly and efficiently.

Detecting errors 

There are several ways accounting teams can detect errors. The old-school way is to manually review financial statements. But just as manual data entry is error-prone and inefficient, so is manual data review. 

Sometimes, spotting an error in financial records is relatively simple — sudden spikes or drops in balances are telltale signs of an error, for example. Other times, it can be like finding a needle in a haystack. Either way, you can take the manual strain out of the process using automated error-detection tools. 

Regular account reconciliations also help spot discrepancies between your general ledger and external records. But again, doing this manually is time-consuming and painstaking. Modern, AI-powered accounting tools can automate account reconciliation for you, flagging any discrepancies they find along the way. 

Once you’ve identified a discrepancy, you can use your accounting system’s audit logs to check when and where the error occurred. This can help you understand and rectify the issues that led to the error in the first place. 

Correcting errors

Once you’ve detected an accounting error, you need to correct it. There are different ways you can do this, depending on the nature of the error. For incorrect or missing transactions, you’ll need to make entries into the accounting journal to rectify them. Here are two key examples: 

• Reversing journal entry. You can use a reversing journal entry that cancels out the original entry by switching the debit and credit accounts.
• Correcting journal entry. You can use correcting journal entries to fix transactions that are misclassified, incorrect, or missing altogether.  

If the error impacts previously filed financial statements significantly, you’ll need to consider restating the affected reports. 

Rebalancing the books

Once you’ve made any corrections, the next step is to review the trial balance to ensure that all debit and credit entries are equal. This process ensures that the correction was made accurately and the accounts are balanced. 

If debit and credit entries aren’t equal, it’s a sign that something is still wrong. Either your adjustment wasn’t made correctly or there’s another error that hasn’t been identified yet. 

Documenting corrected errors

Just as important as detecting and fixing errors is understanding why they happened. This helps prevent the same errors from occurring again and again in the future. The best way to learn from mistakes is to document them. This provides a future reference and learning tool for team members. 

When documenting corrected errors, be sure to include information on: 

• The type of error
• Why it happened
• How you detected it
• What you did to fix it

The why it happened part is particularly important. By understanding the root cause of accounting errors, you can strengthen your internal controls and make other operational changes to ensure it doesn’t happen again. 

For example, if a duplicate entry was caused by two accountants unknowingly entering the same transaction, it’s clear that there’s an issue with communication and transparency around responsibilities. You could fix this issue by implementing a practice management platform that provides top-down visibility into who’s working on what. 

Common tools for rectifying accounting errors

By now it should be pretty clear that manual accounting processes are problematic — both in terms of accuracy and efficiency. Thankfully, there are plenty of technological solutions that can help you spot and rectify accounting errors. Here are the main ones to consider:  

Accounting software

Most modern accounting software comes with tools for identifying discrepancies in financial data — including reconciliation tools, trial balance checks, and audit trails. 

Besides flagging potential errors, the best software offers robust accounting data analytics. This can provide real-time snapshots into your accounts, helping you spot irregularities and anomalies that may indicate errors.

Spreadsheets

Despite their relative simplicity, accounting spreadsheets can be powerful tools for spotting and tracking accounting errors. You can use conditional formatting and different Excel functions to highlight discrepancies or unusual figures — for example, you can flag numbers outside of expected ranges. 

You can also use spreadsheets to track errors that you’ve identified and resolved. By including the error type, date, affected accounts, and how you fixed it, the spreadsheet can serve as a single source of truth for accounting errors. It can also provide insights into which type of errors are more frequent, enabling you to make operational changes to fix the root causes of those errors.

Audit software

Audit tools can help spot accounting errors quickly and efficiently. Their AI algorithms can pour through huge financial datasets in an instant. They can flag anomalies, discrepancies, and outliers in the data — which you can then investigate manually.

Moreover, audit software can spot deviations from your internal policies and controls, as well as activities that fall outside of compliance rules and accounting standards. 

Tools and tips for preventing accounting errors

Detecting and fixing accounting errors is one thing, but if you can avoid them altogether, you can save yourself a ton of time and trouble. In this section, we’ll run through some handy tools and tips for preventing accounting errors.

Leverage the best accounting tech

There are two overarching ways you can safeguard your firm against accounting errors: automation and organization. Accounting tech is how you achieve both. 

Modern accounting software, for example, can help reduce errors by automating routine tasks such as data entry, expense categorization, and account reconciliations. These platforms also offer built-in validation rules that help ensure that transactions are categorized correctly. At the same time, real-time reporting and audit trails further reduce the risk of human error. 

Accounting practice management software also plays a key role in preventing accounting errors. Platforms such as TaxDome provide a central hub for all your firm’s processes, with powerful tools to help boost organization, efficiency, and transparency across your team. Here are just a few examples: 

• Workflow automation. Run entire accounting workflows on autopilot, including invoice generation, document collection, and client communication. 
• Team management. Delegate work, track deadlines, and gain a top-down view of who’s working on what.  
• Team collaboration tools. Boost internal collaboration with @mentions. Communicate with clients through secure chats, synced email, and SMS.  
• Customizable organizers. Gather client documents and information seamlessly with smart digital forms. Automatically transfer captured data to your CRM to avoid data entry errors.
• Accounting CRM. Manage all your client data and relationships in one centralized hub.

Together, these tools reduce the risk of data entry errors, errors of omission, and duplicate errors. They ensure complete transparency around client data and task management while ensuring consistency and accuracy across accounting workflows. 

Prioritize staff training

Even with the most advanced accounting software, there’s no substitute for human knowledge and expertise. Besides, not all accounting errors can be sidestepped by using technology. For this reason, effective staff training is crucial. 

Ensure that you provide regular training sessions to help your staff stay up to date with the latest accounting standards, tax regulations, and best practices. Focus also on your internal policies and procedures to ensure everyone is on the same page. 

Finally, to maximize the value of technology, you’ll need to provide detailed and targeted training for any software or automation tools you implement. 

Implement strong internal controls

Besides external guidelines and regulations, make sure you implement strong internal controls to guarantee the accuracy and integrity of your financial records. 

For example, you can perform regular internal audits to help identify discrepancies, misclassifications, or unauthorized transactions. At the same time, regular account reconciliations will ensure that your internal records match external statements. 

These measures help to catch or correct errors before they have a major impact. To prevent errors from happening in the first place, make sure your internal processes and procedures are well documented and available for all staff to follow. 

To sum up

In accounting, accuracy is everything. Even the smallest error in financial records can have widespread consequences for a business. 

While it’s impossible to eradicate all errors, you can safeguard your firm against most types of accounting errors by dealing with their root causes — manual data entry, a lack of knowledge, poor communication, and ineffective collaboration. 

How do you fix these underlying issues? By rigorous adherence to accounting principles and internal controls, ongoing education, and adopting the right technology. Alongside accounting and audit software, practice management software can help bring clarity and transparency to internal processes, ensuring that nothing slips through the cracks. 

With an average rating of 4.7 out of 5 from more than 3,500 reviews on G2 and Capterra, TaxDome is the most comprehensive practice management solution on the market. Request a demo today to see it in action.