Balance sheets present a holistic view of the financial standing of a business. However, it is easy for this holistic view to point in the wrong direction, owing to how small misstatements, in this regard, can lead to much larger problems.
Here are some of the common reasons for errors in balance sheets:
When you speak of misstatements in the balance sheet, the most common reason is the incorrect classification of assets and liabilities. For those who don’t already know, assets are all of the passions of the business, as well as any expenses which the business might have paid for in advance. Liabilities, on the other hand, include everything that is owed by the business. Revenue that has not yet been earned is also a liability for the business. Incorrect classifications of assets and liabilities paint such a financial picture of the business that is misleading—at best.
Data Entry Errors
We all know how the latest accounting software programs have simplified accounting, manifold, right? Well, they have opened their doors for misstatements as well. Accounting software programs require users to input data, into the systems, so that reports can be made, meaning that the reports will only be as good as the inputted data. If there is an error, for example, in the data input, then you can be certain of the fact that there will be errors and misstatements in the resulting financial statements as well.
Speaking of data entry errors, one of the biggest kinds of such errors is omission. There are a number of reasons why a business might fail to record a transaction, with oversight and human errors leading the pact. However, there might be instances when a business deliberately omits information, when it comes to disclosure, thus resulting into a fraud.
Regardless of what the intention of the business’ management might be, it is a fact that if a business failed to record a transaction, it will be reflected in the balance sheet of the business. For instance, if a business failed to record a transaction for expenses or failed to adjust the inventory quantities, you can be certain that the financial statement, in their entirety, will be impacted.
When you speak of errors in the balance sheet, it is a fact that they can significantly impact the decisions of the management as well as provide a false picture of the business’ standing to the stakeholders. Bearing that in mind, it is essential for businesses to take such measures that limit the damage caused by such errors as much as possible.
While it is true that accounting errors are, at times, unavoidable owing to the large volume of financial data; it does not, at all, means that the management should not take such measures that can take care of such errors before they have a chance of causing mayhem. If your business would like advice, in this regard, the experts at SKB Accounting would love to be of assistance!