Have you ever thought, I know we made more money than ourstatement shows, or I know we don’t owe that much in taxes; we neverhave any money! These moments of confusion are usually the result of eitheran assumption that your data is accurate, or a misunderstanding of howfinancial statements work.
Where did all the cash go?
You can always find the answer in your balancesheet. One of the first red flags that something is amiss is when your balancesheet tells a different story than your income statement. The key to unravelingthe mystery is understanding the balance sheet, which shows your financial dataat a fixed point in time. There are three pillars of a balance sheet.
- Assets: WHAT YOU OWN – Cash, receivables, equipment,supplies, inventory, land, etc.
- Liabilities: WHAT YOU OWE –Accounts payable, accrued expenses, bank debt, credit, etc.
- Equity: NET VALUE – Assets minus Liabilities
A business owner’s primary goal is to increase profit month over month. So, when a CEO reviews a balance sheet, their eyes typically skim right to net value. A mistake on the balance sheet will never be in your favor. If the value is inflated, demise awaits. If the value is deflated, you miss opportunities. Novice bookkeepers tend to make the mistake of confusing assets and expenses. The ripple effect is showing less expense and more profit and failing to price future jobs with the true associated costs. Ensuring the right people with the correct understanding control your books is the first step to avoiding errors. Outsourcing accounting services is a great way to make sure the job is done right the first time.
Another tip is to approach your assets, liabilities,and equity in the same the way you look at your income statements. Keep ahistorical record or your balance sheet and compare the data month over month.A snapshot view is great for a quick assessment, but if you want to avoiddiscrepancies, you need to look at the whole story.
Understanding your financial statements
When a CEO lacks the financial knowledge to catch nuances in their statements, they are unable to take corrective action to change the results. Once you understand the language of your financial statements, you can interpret what they mean to your organization’s financial health. For example, knowing what you sell beyond the widget is a critical step to calculating your true assets. Likewise, a mature business owner knows that most likely reason for a discrepancy between a healthy P&L statement and a low cash account is lagging receivables. The numbers on the page are clues. When you learn to read the clues with the big picture in mind, you are better positioned to make sound business decisions. Failing to understand variances, overreacting to numbers on a page, and not catching insufficient and inaccurate data are clear indications that you are a good candidate for external help.
Financial statements can be misleading. As a business owner, noticing when something is amiss is a key element to managing your organization and driving growth. Do not let misleading financial information or a misunderstanding of financial statements be the downfall of your company. Ensure that you and your managers have the right financial management skills. We can assist you in developing accounting practices that will help make your company more profitable. Call us to learn more about our outsourced accounting services.
FAQs
A prior period error shall be corrected by retrospective restatement except to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the error.
What are the effects of misrepresentation of information in a financial statement? ›
Intentional misrepresentation of financial statements can result in legal action, arrest and imprisonment of executives, penalties and fines.
What is an example of a change in accounting estimate disclosure? ›
Changes in accounting estimates result from new information. Common examples of such changes include changes in the useful lives of property and equipment and estimates of uncollectible receivables, obsolete inventory, and warranty obligations, among others.
What is the correct order of accounts listed? ›
On the trial balance the accounts should appear in this order: assets, liabilities, equity, dividends, revenues, and expenses. Within the assets category, the most liquid (closest to becoming cash) asset appears first and the least liquid appears last.
How do you correct errors in financial statements? ›
How Do You Correct Accounting Errors? Often, adding a journal entry (known as a “correcting entry”) will fix an accounting error. The journal entry adjusts the retained earnings (profit minus expenses) for a certain accounting period.
What is an example of a correction of an error in previously issued financial statements? ›
Explanation: An example of correcting an error in previously issued financial statements is a change from the cash basis to the accrual basis of accounting. Under the cash basis, we don't account for transactions that do not involve cash, but we incorporate them under the accrual basis.
What happens if financial statements are incorrect? ›
Legal Troubles: Inaccurate financial data can lead to legal issues, including fines and penalties for regulatory non-compliance. Resource Misallocation: Inaccurate data can result in misallocation of resources. This can lead to excessive spending in areas that don't yield desired results, affecting profitability.
What are the damages for misrepresentation? ›
The Damages that can be Awarded to You
If a fraudulent misrepresentation is proved at trial, then you may be entitled to: 'Tortious' Damages – These are awarded with the aim of placing Party B in the position they would have been in if Party A had not made the misrepresentation.
What are the consequences of innocent misrepresentation? ›
Innocent misrepresentation: a representation that is neither fraudulent nor negligent. The remedies for misrepresentation are rescission and/or damages. For fraudulent and negligent misrepresentation, the claimant may claim rescission and damages.
When should financial statements be restated? ›
Restatements are necessary when it is determined that a previous statement contained a "material" inaccuracy. This can result from accounting mistakes, noncompliance with generally accepted accounting principles (GAAP), fraud, misrepresentation, or a simple clerical error.
Prior period adjustments can arise due to a variety of reasons, including errors, changes in accounting principles, changes in estimates, or corrections of prior period misstatements.
Which of following accounting practices could be considered aggressive? ›
Aggressive accounting can be done by delaying or covering up losses or artificially inflating its value by overstating earnings. Companies can inflate revenue by reporting gross revenue and maintain deferred expenses on the balance sheet instead of reporting them on the income statement.
What are some examples of transactions that may require adjustments? ›
The following might require adjusting journal entries:
- Accrue wages earned by employees but not yet paid to them.
- Accrue employer share of FICA taxes due.
- Accrue property taxes.
- Record interest expense paid on a mortgage or loan and update the loan balance.
- Record prepaid insurance.
Usually, liabilities are divided into two major categories – current liabilities and long-term liabilities. On a balance sheet, liabilities are typically listed in order of shortest term to longest term, which at a glance, can help you understand what is due and when.
Does a trial balance have to be in order? ›
The trial balance accounts are listed in a specific order to help in the preparation of financial statements.
What is a prior period error and how and when it is corrected? ›
Prior period errors are corrected retrospectively by restating the comparative amounts for the prior period in which the error occurred or if the error occurred before the earliest period, restating the opening balances of assets, liabilities and expenses for the earliest prior period presented (except to the extent ...
What are the two methods for correcting errors in accounting records? ›
Accounting error correction entries
- Make a single journal entry that fixes the error when combined with the incorrect entry.
- Reverse the incorrect entry and use a second entry to record the transaction.
What's the best way to fix audit mistakes?
- Identify the root cause. Be the first to add your personal experience.
- Communicate and document. Be the first to add your personal experience.
- Implement corrective actions. ...
- Review your audit process. ...
- Learn from your mistakes. ...
- Prevent future mistakes. ...
- Here's what else to consider.
Rectification of Errors Suspense Account
- Identify the account with the error.
- Ascertaining the excess debit or credit.
- In case of a shorter debit or an excess credit in an account, the concerned account is thus debited. ...
- Then pass the necessary journal entry by debiting or crediting the Suspense A/c.
