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An error account is a type of class or account that is often used in accounting situations to temporarily store transactions related to errors in trading activity. The idea behind the error account is to keep track of the transaction until the origin of the error is identified and resolved. At that point, the mistake is moved from the account and posted to the correct account within the bookkeeping records. This approach is considered to be in line with generally accepted accounting principles and serves as an efficient means of keeping track of situations that require additional scrutiny before making a final posting.
One of the main benefits of the error account is that use of this strategy helps to minimize the possibility of trading errors that may create additional accounting difficulties later on. By isolating the questionable transaction into the account, the chances of forgetting the issue until a later day is avoided, and the posting does not have the opportunity to create an imbalance between other accounts. This can save accountants a great deal of time, in that failure to use an error account for in the event of some inconsistency could mean having to go back through a number of entries that occur from the original date of the transaction to the date in which the discrepancy was finally resolved.
Use of an error account can also aid the process of auditing the accounting books at any given point in time. Since entries maintained in the account are somewhat questionable for some reason, the presence of the transactions helps to explain why they were not posted elsewhere. This effectively lets the auditor know that the inconsistencies have already been identified and investigation is underway. From there, the auditor can make allowances for those particular transactions, and may even come across something later in the audit that helps to shed light on those investigations.
It is important to note that placement of a transaction into an error account is not an indication that someone is attempting to cook the books or attempt some sort of financial fraud. Most often, the transactions that are posted to the account are there for no reason other than human error occurring at some point during the transaction. For example, a transaction may be temporarily posted to an error account due to a transposition in the number series of a bank routing number. Once the transaction is investigated and the transposition is discovered, actions can be taken to complete the transaction using the correct routing number and the line item can be removed from the error account. Since many businesses make it a point to monitor error account activity at least on a weekly basis, resolution for most issues take place within a relatively short period of time.
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