Keeping Track of Transactions – Checking It Twice
With all those numbers ﬂoating around, mistakes are inevitable. One way to catch mistakes (though this is by no means foolproof) is to prepare a report called a trial balance. A trial balance is basically a listing of every account and its balance, with debit balances on the left and credit balances on the right. The total debits are supposed to equal the total credits, but they sometimes do not balance on the initial run-through. If your debit and credit balances are out of whack, you know there is a mistake in there somewhere.
When you uncover an accounting mistake, you can’t just erase it or cross it out; you have to write up a correcting journal entry to put the affected accounts back in the right balance. These entries are recorded in the general journal and identified as correcting entries.
The trial balance can also help you ﬁnd wrong balance accounts.
These are accounts with the wrong side balances; for example, an asset account with a credit balance, when all asset accounts should have debit balances. In most cases, the error is caused by either a simple misposting or math mistake.
Different Kinds of Mistakes
With so many accounts, and so many different places that the numbers show up, it is literally impossible to be completely error-proof—even when you’re using a computerized accounting program. There are also many different kinds of possible mistakes; catching and correcting them depends on the type of mistake made.
The most common accounting mistakes include:
- Math errors (such as adding a column of numbers incorrectly)
- Using the wrong account in a journal entry
- Mixing up the debits and credits in a journal entry
- Posting to the wrong ledger account
- Posting the wrong dollar amount to the ledger account
- Posting a debit as a credit (or vice versa)
Some of these mistakes keep your trial balance from balancing; others don’t, and those errors are much more difﬁcult to spot. For example, posting the wrong dollar amount to the ledger account will upset the balance, but posting the right dollar amount to the wrong ledger account will not. When you have been doing the accounting work for a while, you will become familiar enough with the accounts to notice when something seems out of whack, even when your trial balance balances perfectly.
Finding and Fixing Mistakes
If your trial balance doesn’t balance, the ﬁrst thing you should do is add up both the debit and credit columns again. A lot of the time, that will solve the problem. When that quick ﬁx doesn’t work, it’s time to move on to step two.
Step two is ﬁguring out the difference. You can do that by subtracting the debit column total from the credit column total. If the difference is divisible by nine, that usually indicates a transposed number. Double-check the numbers you’ve picked up from the ledger; one of them will probably have been copied incorrectly. When that difference isn’t divisible by nine, check to see what happens when you divide it by two. If that comes out to an even number, or a number that seems very familiar, it’s quite likely that a debit has been posted as a credit (or the other way around) in one of the accounts. That calls for a quick look through the general ledger to ﬁnd the account with the misposting. Other times, a completely wrong number gets picked up, such as posting an amount from one journal entry to an account from the next. Correcting this usually takes going through both the ledger and the journal until you locate the mistake.
Other types of mistakes—the ones that won’t knock your trial balance out of balance—are nearly impossible to ﬁnd without a solid acquaintance with your accounts. You will really only notice that an account balance is off when you know approximately what that balance should have been. That just takes experience in doing the books.
Transposed numbers are among the biggest headaches in accounting. A transposition error occurs when you inadvertently switch the order of the digits in an amount, such as recording $19 as $91. It also hap- pens if you skip a zero at the end, recording $450 as $45, for instance. Transposition errors always result in a difference that can be evenly divided by nine.
Fixing mistakes depends on where they occurred. Mistakes made in the journal entry phase require a correcting entry in the general journal. To do that, you have to identify the accounts involved, and the amount by which each is off; then you write up an entry that makes up the difference. For example, suppose you debited insurance expense for $50 instead of debiting interest expense for that amount. To correct the error, you would debit interest expense for $50 and credit insurance expense for the same amount. For a posting error, you can simply add a line on the ledger page to correct the balance and include an explanation for the entry.