Natural and legal persons engaged in business are obliged to file income tax returns for the calendar or business year. In paper form within three months after the end of the year, in electronic form we have four months to file. If we have a tax advisor or are subject to an audit, we have a deadline of six months after the end of the year. The basis for filing is the maintenance of tax records or double-entry bookkeeping. In the case of tax records, the taxable amount is the difference between income and expenditure (i.e. the actual money received or sent). For double-entry bookkeeping, the basis is the difference between income and expenses.
In order to determine the tax base correctly, it is necessary to keep proper accounting records. Recently, more often than not, we are seeing accounts that are poorly kept, there are no checks on how the accounts are kept, the balances of the various accounts are not checked, and very often there are ‘unclear items’ in the movements in the bank accounts. There are errors in the accounts.
Most entrepreneurs rely on their accountants, advisers, economists, but the responsibility for accounting and tax returns lies with the entrepreneur or the corporate body.
The accounts should be conclusive and free from errors. Incorrect accounting means:
- failure to keep accounts
- failure to draw up accounts
- failure to produce an annual report
- failure to apply international accounting standards where their application is mandatory.
If an entrepreneur or accounting entity fails to fulfil its obligations under the Accounting Act, it is liable to a fine for such an offence. Fortunately, this is less common.
However, errors in accounting are relatively common. And it does not matter whether it is managed by an internal accounting department, an external accounting firm or the entrepreneur himself. Errors and the risk of them occurring can be minimised by various control mechanisms, by using an accounting software or by investing in an employee or an outsourced person who understands accounting well and is regularly trained in the field. Even so, accountants are only human and mistakes can happen at any time.
Accounting is quite a complicated field that has to comply with all the requirements of current legislation and the Accounting Act. A large number of documents are processed, especially when the accountant is in charge of filing documents, tax returns, reports and summaries or the entire accounting agenda. We can define common errors in it, which appear more frequently than others. These may include:
- typos – wrong amount, date, account number, variable symbol, etc,
- confusion between tax and non-tax documents,
- omission of posting a document or duplication (posting the same document more than once)
- errors in posting to the correct accounting period.
The error is not intentional, it can occur very easily and if it is detected it must be corrected. Corrections in accounting have fixed rules which are determined by the aforementioned Accounting Act. The Accounting Act No. 563/1991 Coll., §35, speaks of three steps to be followed.
- It is necessary to comply with all accounting principles and principles – the correction of an error must be complete, correct, understandable, clear and conclusive.
- Correct the error without delay – once the error is identified, it must be corrected immediately and without delay.
- Complete information about the correction – the correction of the error must show at a glance who made the correction, when they made it and the content of the document before and after the correction.
The Accounting Act also dictates what type of document cannot be considered a correction of an accounting error. In the first place, this is a situation where the correction does not alter the content of the original accounting record. A correction is also not valid if the requirements of completeness, evidence, correctness, clarity and transparency are not met. Where the new accounting entry is not clear, it cannot be considered a correction.
There may be various situations where an error arises:
- the error is on a document that has not yet been posted,
- the error is already in the accounting system,
- the error took place in a previous accounting period (in this case it depends whether the discovery of the error took place before or after the closing date).
The easiest time to correct an accounting error is, of course, when it is still on the accounting document. However, if the document has already been posted, the correction must also be made in the accounting system. Correcting an accounting document has its own requirements. The erroneous entry must be crossed out with only one horizontal line so that the entry is legible. This satisfies the requirement to preserve the content of the original document.
It is not permitted to use over-stickers, bleach, erasers or to cross out, tear or scratch out information. The correct entry must then be made, the date on which the correction was made and the name of the person who made the correction. That person is then responsible for the accuracy of the correction and compliance with the law.
If the document with the incorrect data has already been entered into the accounting system, the correction must be made there as well. According to the Accounting Act, it is not possible to delete an incorrect entry and create a new one. However, there are several ways to correct the error. The simplest is to issue a corrected document and replace the original document with it.
Another option is cancellation, where the wrong entry is posted with a negative sign and a new entry with the correct data is created in the accounting software. Alternatively, a partial reversal is also possible, where only the difference between the amounts is posted with a negative sign. This option is only possible if the incorrect amount exceeds the higher amount.
If the correct amount is higher than the incorrect amount, an additional accounting entry can be made. The difference between the two amounts is then entered. If the accountant has completely omitted to post a document to the system, a new entry can be made.
If we are in a situation where we find an error from a previous period when we check the balance sheet accounts during the cost and revenue settlement, there are two possible solutions. These differ in whether or not the accounts have already been approved. If the closure has not yet taken place, the error in the books and system can be corrected as described above.
Once the closure has been approved, it is no longer possible to interfere with the accounts or to add any data. Here again there is still a chance for correction. Once the closure has been approved, it must be determined whether the amount is significant or insignificant.
Thus, if a company generates turnover in the hundreds of thousands or even millions of crowns and an error of tens or hundreds of crowns is found, it may be considered an insignificant amount. In such a case, it is sufficient to include it in the company’s costs or revenues in the current accounting period. Otherwise, the error must be described in the ‘other profit or loss’ document and attached to the financial statements.
In the event of a more serious error which also results in an incorrect determination of the tax base, the accounting error is corrected in the following year using the other profit or loss account, but an additional corporation tax return must also be filed.
Therefore, to avoid or at least minimize accounting errors, put controls in place. You can use a good accounting program. Get advice or set up inventory and control procedures. Ask for an inventory of accounts, i.e., a breakdown of account balances into individual items, each year for the year-end closing. Check the status of accounts payable and accounts receivable. It should be common practice to perform these checks during the year and not leave them to the last minute before filing the return. Find a firm that will do your bookkeeping, understands the industry well and is regularly trained in it. It has control mechanisms in place that are used on at least a monthly basis. When choosing an accounting firm, have these mechanisms described. Ask about the steps and processes the firm has put in place to minimise the risk of errors. These processes should help the accountants and give you confidence that your accounting is in good hands.
