Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Accounting Error

What it is:

An accounting error is an error in the process of systematically recording, measuring and communicating information about financial transactions.

How it works (Example):

Mary is an accountant at Company XYZ. She is paying the office’s electricity bill but records the invoice as a health insurance bill. Mary has made an accounting error. Mary could also make an accounting error by recording the payment as a deposit in the account or by recording the payment for the wrong amount or wrong month.

Why it Matters:

Accounting is tremendously important because it is the language of business and it is at the root of making informed business decisions. Managers must be proficient in accounting in order to make good decisions, which is why it’s easy to see how even small accounting errors can lead to big, wrong decisions.

At the heart of accounting is the double-entry bookkeeping method. This involves making at least two recording entries for every transaction: a debit in one account and a credit in another account. The method helps prevent errors because the sum of the debits should equal the sum of the credits.

Accounting can be controversial, however, in that accounting rules and methods are sometimes subject to interpretation or can appear to distort a company’s true performance. This is another important reason that effective leaders and managers must thoroughly understand the accounting impact of their decisions, as well as the difference between an accounting error and a difference in accounting method.

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