Four Common Accounting Mistakes
Accounting mistakes are unintentional errors that occur during the accounting process. Such mistakes include
clerical and mathematical errors in accounting data used for preparing financial statements,
errors in applying accounting principles and
misinterpretation or omission of transactions whilst preparing financial statements.
On account of their randomness, accounting mistakes affect all classifications of accounts. Accounts receivable, cash expenses, profits and bank reconciliations are accounting items that often present four common accounting mistakes documented in the following paragraphs.
Accounts receivable transactions are sometimes adversely affected by errors relating to invoices. Invoice errors include inaccuracies in recording customers’ tax status, quantities of items, unit prices and total cost. With the proliferation of accounting software packages, invoicing errors no longer occur as often as they did formerly. QuickBooks and other accounting packages facilitate automation of the invoicing process. This has helped to minimize related accounting mistakes and any consequent unpleasantness between suppliers and their customers.
The absence of pertinent supporting documents is one reason for the common accounting mistakes associated with cash expenses. Receipts and other supporting documents tend to be unavailable because responsible personnel do not obtain or retain these documents. These omissions prevent the recording of the expenses. Consequently, income is overstated and taxes are overstated for the respective periods; this causes cash flow and other accounting problems. Supporting documents for cash expenses are to be obtained and safely retained as hard copies, electronically or in both these forms. Cash expenses should be formally monitored.
Profits are confused with cash flow because many persons have the erroneous notion that profits are held in bank accounts and are readily available as cash or cash equivalents. This notion is erroneous partly because there usually are timing differences between sales and cash receipts: many suppliers establish credit terms for customers, instead of engaging in cash transactions. Net profits are the excess of revenues over expenses but the timing of revenues and expenses does not synchronize with the timing of cash inflows and outflows; cash flow mechanisms monitor these inflows and outflows. Non-cash expenses such as depreciation, gains or losses on the sale of fixed assets, prepaid expenses and deferred income are additional reasons for profits being different from cash and bank balances available for spending.
Failing to examine the pertinent bank statements is one of the common accounting mistakes that holders of corporate and personal bank accounts often make. On account of their utilizing software packages for their accounting, many of these holders of bank accounts operate under the baseless notion that their accounting records – including those for bank accounts – are accurate. To verify the accuracy of their accounting records and of their bank statements, account holders must periodically and routinely reconcile the accounting records with the bank statements.
The preceding four common accounting mistakes can easily be avoided. They militate against personal and corporate growth. Quantitatively and qualitatively, these accounting mistakes can be costly – particularly if they are undetected for protracted periods.