Study: Identifying Accounting Errors
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Slides 1-3 (2m:50s)
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Slide 1
Welcome to Introduction to Accounting Preparing for a User’s Perspective
Identifying Accounting Errors
Slide 2
In this video I am going to talk about some tips and tricks for identifying accounting errors. Errors can come into your accounting records for a number of reasons. For example maybe we:
• added numbers incorrectly
• subtracted numbers incorrectly
• added when we should have subtracted
• subtracted when we should have added
• forgot to record or post an entry
• recorded or posted an unnecessary entry
• debited when we should have credited
• credited when we should have debited
• added an extra $0 onto a number that we entered
• left off a needed $0
• transposed a number
Slide 3
Now what we need to do is introduce kind of a decision tree as to how you can home in on these types of errors and correct them. First you want to prepare your trial balance. Ask yourself “Does the trial balance balance?” If the answer is “Yes” you can branch over and perform some analytical procedures. That’s where you compare the account balances in your trial balance to your expectations. Those expectations may have come from your budgets or may have come from some industry information.
There you might find that you forgot to record or post an entry, or you recorded or posted an unnecessary entry, or you simply recorded the numbers wrong. Now, if the trial balance doesn’t balance, we have a few other processes that we might do to discover what caused the trial balance not to balance. For example, we can simply scan down the list of accounts and balances in the trial balance and look for errors. Sometimes the [incorrect] number just jumps out, it just doesn’t make sense and you can just recognize it right off the bat. Other times you might simply have to re-add up the numbers in the trial balance. Just recheck your math. Maybe in your Excel “=sum()” formula you forgot to include the whole range of numbers or maybe you just left out a number or something. So simply just recheck your math.
There you might discover that you added or subtracted numbers incorrectly, added when you should have subtracted, or subtracted when you should have added.
Now after going through that you may have discovered some errors and fixed those.
Next question, “Does the trial balance balance now?” If the answer is “Yes” you can branch over to the analytical procedures again and hopefully find any other remaining errors.
Now if the answer is “No” we have a few other things you can do. For example, divide the difference, on the bottom of the trial balance, by 2. It’s that out-of-balance number at the very bottom of your trial balance, divide that by 2. That may help you discover that you debited when you should have credited or credited when you should have debited.
Another alternative is to divide the difference by 9. That could help you find a few different errors. For example, maybe you added an extra $0 on the number that was input, or maybe you left off a needed $0, or maybe you transposed a number.
In the remaining slides I am going to go through different examples related to this decision tree that might help you better comprehend what I have just introduced.
Slide 4 (0m58s)
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Slide 4
Here is a trial balance. I’ll be using this ABC Company trial balance as the basis for all these remaining examples but sometimes I am going to change the numbers in here to create errors.
Here’s our first example. We just prepared a trial balance, and the question is “Does the trial balance balance?” and the answer is “No, it doesn’t” because we have $500 more credits than we do debits.
What did we say we should do? We should probably scan these numbers for errors and recheck our math.
If you were to do that, you might recognize that you’ve added or subtracted numbers incorrectly, added when you should have subtracted, or subtracted when you should have added. Now if you were to get out your own calculator and reprove out these numbers, you’ll actually realize that that ($500) was flat out wrong. We just mathematically added the numbers up incorrectly.
It really does balance. That’s just an “Ooops!” You made a mistake, popped it into your calculator again and now you’ve fixed it and the trial balance does balance.
Let’s go on to another example.
Slide 5 (1m:12s)
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Slide 5
Here’s another example. In this example, I’ve changed some of the numbers to create an error here and if you were to add these up, you would realize that it adds up to having $500 more debits than credits; therefore, the trial balance does not balance.
How can we discover where the error is?
One thing we can do is we can take this difference and divide it by 2 and we get the number $250. In that case, it may be that we debited when we should have credited. That may have caused this extra $500 in debits.
For example, by scanning down here, are there any accounts that normally should be credits that may [incorrectly] be debits? You will notice that utilities payable is a liability. It normally should have a credit balance, because it is increased on the credit side. Therefore, it appears that we debited utilities payable $250 when we should have credited it $250.
Now had this total been a credit of $500, it could have been a situation where we credited instead of debited. By fixing that, we put in the correct credit balance of $250 and the trial balance would now balance.
Let’s go to another example.
Slide 6 (1m:25s)
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Slide 6
Here’s another example, where I’ve modified some of the numbers here to create an error. Let’s add it up, and we get an out-of-balance position of $5,400. That means we have $5,400 more in debits than we do in credits, so it doesn’t currently balance.
What can we do? We can divide the difference of $5,400 by 9 and we get the number 600. As you noticed, there are no extra decimal places. $5,400 is perfectly divisible by 9 and that’s a key point for finding transposition errors and sliding errors. Had there been decimals, then it probably would not be a transposition or sliding error.
Since it is perfectly divisible by 9, it could be a sliding error in this example. What you would want to do is scan the numbers of this trial balance and look for a number that looks like $600 only with more or fewer zeros.
When we scan up here “Wow!” there’s $6,000, if we were to just get rid of that zero it would look exactly like $600, and, surprisingly enough, it’s that one [Prepaid rent] that is the mistake, and therefore, prepaid rent should be $600, and we then balance by fixing that error.
We would have discovered that by going back and looking at our prepaid rent ledger account and maybe we simply took the $600 from the prepaid rent ledger account and accidentally wrote it in as $6,000 and that’s how we may have made that mistake.
Let’s go on to another one.
Slide 7 (0m:51s)
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Slide 7
We check our math on the trial balance and we discover that it doesn’t balance showing that we have $270 more credits than we do debits. So, it does not balance. We can divide that difference of ($270) by 9 and we get a credit of $30.
You will notice once again there are no extra decimal places, so that means it was perfectly divisible by 9. So, in this case we can for transposition errors, such as utilities payable. What we do is we go and check our ledger accounts to see if maybe we wrote it in incorrectly. In this case we wrote down utilities payable as a credit of $520, when it really should be a credit of $250. We would have recognized that based on the ledger. So, by removing that transposed number and putting in the correct number, our trial balance balances.
Slides 8-10 (1m:31s)
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Slide 8
Moving on to our final one.
We’ve determined that our trial balance does balance, but that doesn’t mean that these numbers are all correct, because they can be correct at the incorrect debit and credit amounts. For example, we can compare our account balances her to our expectations, our budgets, what we thought these numbers should be.
If you look at these numbers, it is possible that we may have forgotten to record or post an entry, or we recorded or posted an unnecessary entry. For example, why is prepaid rent still so high at the end of the year? Did we prepay for a really long time or did we simply forget to adjust the prepaid rent to indicate the amount that we have actually used up? Rent expense is too low. We would know this based on our understanding of our own business. Our analytical procedures are dependent on our knowing our business and possibly using budgets and other things to recognize that.
By getting rid of those incorrect numbers, and properly adjusting prepaid rent down and rent expense up, the trial balance will still balance but now it is balancing using the corrected, adjusted numbers that we want to put on our financial statements.
Moral of the story: You can use simple math tricks and basic analytical procedures to help you quickly find errors in your accounts and enjoy your weekends.
Slide 9
Moral of the story: You can use simple math tricks and basic analytical procedures to help you quickly find errors in your accounts and enjoy your weekends.
Slide 10
I hope this has been helpful to you. There are some great tips and tricks there that might even help you get through your homework a little bit faster and I wish you all the best on the quiz.