What is a 'Transposition Error'
A transposition error is a simple error of data entry. Transposition errors occur when two digits that are either individual or part of a larger sequence of numbers are reversed (transposed) when posting a transaction. Although this error is small and unintentional, it can result in huge financial losses or errors in some instances.
BREAKING DOWN 'Transposition Error'When two adjacent numbers are transposed, the resulting mathematical error will always be divisible by 9 (e.g., (72-27)/9 = 5). Bank tellers can use this rule to quickly find their errors in many cases. Transposition errors also occur in accounting firms, brokerages and all other areas of finance.
Transposition errors are generally the result of human error and are unintentional in nature. In regards to accounting, it is most common when data is being entered manually and referenced from another source. This could include instances where information from an invoice received by accounts payable is entered into the balance sheet inaccurately. It may also occur in instances where checks for debt payments are keyed incorrectly, resulting in an improper payment amount being issued.
Further examples can include instances where two numbers are interchanged within two accounting fields. For example, should two line items exist that need to be entered into a spreadsheet or other recording mechanism, if the amount from item A is accidentally recorded in the line for item B, and vice versa, this error could be considered a transposition.
Ramifications of Transposition Errors
When the value of assets is being recorded and a transposition error occurs, this can cause inaccuracies to be reported to various agencies, such as the Internal Revenue Service (IRS) or shareholders. This can affect areas like tax liability, should the error create a large enough difference. For example, an error of record $24.74 as $24.47 would be relatively minor as the error totals only $0.27. Should the amount $1,823,000.00 be recorded as $1,328,000.00, the resulting error has a value of $495,000.
Identifying Transposition Errors
If a business’s accounting records are showing a discrepancy, either positive or negative, one easy operation to try is dividing the discrepancy by 9. If a transposition error is a possibility, the amount will divide evenly by 9. While the amount being divisible by 9 is not a guarantee of a transposition error, this can provide guidance regarding what sort of error should be looked for first prior to more complex possibilities.
Transposition Errors in Other Industries
A transposition error can occur in any industry where data received in one form must be reentered into another. This can include an incorrect phone number, address or ZIP code being entered into a customer’s profile, as well incorrect amounts being recorded for items being ordered or even in medication dosing information.