One of the first things to do when starting a new business is to build your accounting process. While many businesses take the help of outsourced accounting services, not every business has the scale to do so, so they opt to do their accounting on their own. However, this process is not easy, and your accounting process will not always be streamlined. There are so many steps and systems involved in creating an accurate financial report that the result is sometimes unclear to even the most experienced accountants. And it is but evident that ven a hight experience accountant might also make minor errors and miss out on such discrepancies. It is important to spot these discrepancies as early as possible to avoid an external audit as well as lose both time and money. It may seem like an easy task on the surface, but it involves a lot of back-and-forth checking for errors and mistakes, which is why accounting discrepancies are so hard to spot. This article outlines tips for spotting discrepancies in your accounting process and indicators of such discrepancies!
Before learning about ways to spot discrepancies is essential to learn about all possible accounting errors. There are various accounting errors that one might commit. Thankfully, most of these can be detected in the trial balance. However, a few do not affect the trial balance, such as errors of commission whereby you record a debit or credit to the wrong subsidiary account or ledger. It is essential to avoid or correct these errors at the right time before they cause more trouble. Some other common errors include –
- Error of omission – This error occurs when s financial transaction is either not recorded or completely omitted.
- Error of Original Entry – This error occurs when you record the wrong amount for a transaction.
- Error of Duplication – This error occurs when the same transaction is recorded more than once.
- Error of Commission – This error occurs a transaction is recorded to the wrong subsidiary account or ledger.
- Error of Principle – This error occurs when the wrong accounting principle is used for recording a transaction.
- Error of Entry Reversal – This error occurs any transaction is recorded in reverse. For example, a debit is recorded as a credit or vice versa.
- Transposition errors – This error happens when two or more digits in a transaction are reversed.
The above list of errors is not the only form of discrepancies. There could be many factors that could result in discrepancies.
Indications That There are discrepancies in your accounting are –
- Presence of Suspense Account:
A suspense account is an account that has all entries from doubtful transactions which need to be analyzed and properly classified. You will not find this type of account if your records are accurate.
- Mismatch in profits visible in bank statement as compared to actual profit:
If your books reflect you’re making a healthy profit, but your bank account looks the complete opposite way with little to no cash balance, there are problems. These discrepancies can spell trouble for small businesses operating on thin margins. If your bank statements reflect significantly lower profits than your books, it is a sign for you to get in touch with an accountant.
- General Expense Account with high amount
Do you have a large General Expense Account? This might be a sign of inaccuracies in your accounting. Direct expenses contribute directly to the service or production of the business. It could be labour, utilities, heavy equipment rentals, electronic media, raw materials. Having a large amount in this account is not a good sign as there may be ties to hidden costs like frauds, bribes and kickbacks.
How to find accounting errors: Ten tips
1.Use accounting software
The first and most obvious way to spot discrepancies in your accounting process is to use a software program. There are many different accounting programs available to help you with this process. If you are unsure which program to use, ask a professional accounting services provider for advice.
2.Conduct routine reconciliations
If you are using accounting software, it is essential to review the financial statements and reconcile any discrepancies periodically. This will help identify any discrepancies that can potentially lead to more fines or potential fraud. It is a good idea to conduct this process at least once per quarter.
3.Get an audit team involved
Many people who work in accounting have no clue how to detect discrepancies in their process. Instead of just speaking to the accountant, they should involve an audit team. Doing so can help you get to the roots of each discrepancy and avoid a similar case in future. All this can help stop money from being lost and prevent fraud in the future.
4.Look for anomalies in other departments
You should be particularly wary of unexplained discrepancies in other departments. This can happen if someone else is siphoning off funds or if you have a new employee performing any activities that could hurt your cash flow.
5.Get a third party involved
If you have an accounting process that is not transparent, you’ll have difficulty figuring out whether or not your company is being defrauded. A third party can help uncover the discrepancies in your process and determine if it is being conducted without your knowledge. The third-party could be a colleague, an outside investigator, or a forensic accountant.
6.Track your expenses
Tracking expenses enables you to identify any discrepancies in your accounting process. You can also use the information gathered from tracking your expenses to make more educated purchasing decisions.
7.Have a consistent process
Your accounting process should be designed so that your employees can find discrepancies or mistakes in the same place each time. A consistent approach can make your accounting work much smoother, and you will be able to identify issues faster. If you want to find discrepancies, ask yourself these questions: Are my entries consistent? Do I use the exact entry dates each time? Are my transactions created in a similar format each time? Is there consistency in how I record expenses and income, payments and account balances? And finally, are all my entries accurate?
8.Double-Check every transaction
You should make sure that your accounting process is working correctly by double-checking every single part of it. Checking your books every few minutes can give you the peace of mind that your business isn’t going under because of an error. The best way to check for errors in your accounting process is to use a spreadsheet.With proper caution and a system in place, it is possible to detect and solve every discrepancy in your accounting process. While many small business owners opt to conduct their business accounting process on their own, it could only add up to accounting errors and mistakes. Hiring accounting and bookkeeping services is easier to tackle all the discrepancies in your accounting process. With an expert service provider, you will not have to face such discrepancies. It will help you eliminate any internal fraudulent activities committed by employees or other stakeholders.