As meticulous as most business owners are, mistakes are bound to happen. Hannah Montana made no exclusions when she famously sang, “Everybody makes mistakes. Everybody has those days.”
One of the most common accounting errors is transposition.
Overview: What is a transposition error?
A transposition error happens when you jumble a number as you carry it from one source to another. For example, say you receive a bill for $450 that you accidentally enter as $540 in your accounting software. That typographical error overstates your expenses by $90.
Imagine how common transposition errors were before businesses maintained their books using software. In the analog days, people would record transactions in two separate books — the general journal and the general ledger. With more manual data entry, the likelihood of a transposition error goes up.
Transposition errors can still happen in the digital age. Business owners should regularly scan their accounting records for them. Even small transposition errors can cause more serious mistakes, particularly if you don’t catch them before filing your business taxes.
How to know if you have a transposition error
No single indicator will catch every transposition error. Look for these warning signs when searching for transposition errors in your books.
The closest thing you’ll find to a “life hack” in accounting is the rule of nine: When you transpose two digits next to each other, the difference is a multiple of nine. I know you’re sitting there thinking of examples in your head. Try it: 950 and 590, 295 and 259, 341 and 431 all have a difference divisible by nine.
An unbalanced trial balance
If anything from the bookkeeping basics sticks with you, it’s that accounting is all about debits and credits. Every transaction must have at least one debit and one credit, and the sum of debits and credits must always be equal. A trial balance lists all of your account balances to prove that your debits equal credits.
At least monthly, open your company’s trial balance to make sure there isn’t a difference between the debits and credits.
When your debits and credits don’t match, you might have a transposition error on your hands. Trial balance errors cause inaccuracies on your balance sheet and income statement.
A source document doesn’t match a recorded transaction
You know you’ve identified a transposition error when there’s a discrepancy between a source document and a transaction in your accounting software, especially if the difference is divisible by nine.
Say you recorded a client check for $560 in your accounting software, but the actual check amount is $650. Both the check and your bank statement will show $650, but your books show a $90 lower balance.
How to correct a transposition error
Book a correcting journal entry to correct transposition errors.
Businesses use double-entry accounting to record transactions. To correct an erroneous transaction, you’ll need to record an additional transaction involving the same accounts. You’ll see a correcting journal entry in the example below.
A transposition error example
Say I’m an accounting clerk at your company. After a week’s vacation, I come back to see a pile of bills on my desk that I need to process immediately. In my fatigued stupor, I open the accounting software and start charging through the bills. I get through them as fast as possible because my coworker said there are powdered doughnuts in the kitchen. Among the invoices is an energy bill for $105.
My original journal entry shows:
After I finish processing all the invoices, I produce an accounts payable aging report for your review. Being the diligent business owner you are, you check my work before paying bills. You notice the energy bill says $105, but the aging report reads $150. I overstated the expense by $45.
You relay the error and ask me to correct the books. I record the following correcting journal entry to decrease both the utilities expense and accounts payable by $45.
In this example, my correcting journal entry flip-flops the accounts that are debited and credited. If I had understated the expense — say I recorded the bill for less than $105 — I would have instead added to utilities expense and accounts payable.
2 ways to avoid transposition errors
Follow these tips to keep from making transposition errors.
1. Complete monthly bank reconciliations
Bank reconciliations help you identify transposition errors before they cause further problems for your business. A bank reconciliation compares your accounting records to your bank statement. During the process, match every transaction to source documents, such as receipts and invoices. When something’s amiss, you might have a transposition error.
2. Sync your bank account with your accounting software
Taking manual entry out of bookkeeping can drastically reduce the likelihood of transposition errors. A good first step is letting your accounting software and bank account speak to each other.
Businesses that use the cash accounting method could eliminate virtually all manual transactions by having their software automatically import bank transactions.
Errors are part of the human condition. Implement a system to catch and correct errors promptly to avoid creating more problems for yourself.