DEFINITION of 'Rounding Error'
A mathematical miscalculation caused by altering a number to an integer or one with fewer decimals. The significance of rounding error depends on the circumstances. While it is inconsequential enough to be ignored in most cases, rounding error can have a cumulative effect in the present-day computerized financial environment, in which case it may need to be rectified.
The term "rounding error" is also used sometimes to indicate an amount that is not material to a very large company.
BREAKING DOWN 'Rounding Error'
Financial statements of many companies routinely carry the warning that "numbers may not add up due to rounding." In such cases, the apparent error is only caused by the financial spreadsheet's quirks, and would not need rectification.
For example, consider a situation where a financial institution mistakenly rounds off interest rates on mortgage loans in a given month, resulting in its customers being charged interest rates of 4% and 5% instead of 3.60% and 4.70% respectively. In this case, the rounding error could affect tens of thousands of its customers, and the magnitude of the error would result in the institution incurring hundreds of thousands of dollars in expenses to correct the transactions and rectify the error.