Why Do you Need a Financial Statement?
Financial statements are records and reports created by a company’s management to give insight into a business’s financial condition over time.
It explains the business’s financial health, like how much & how a company generates revenues and how much of it goes to expenses. Thus, it interprets and analyses how a business should operate, like how to manage cash efficiently.
How Important is Financial Statement Analysis?
Financial Statement Analysis evaluates a company’s performance through a balance sheet, income statement and cash flow.
It provides statistical facts to the internal and external stakeholders. The report predicts unbiased data on the cash flow. It will show the business’ profitability and ability to generate wealth.
A thoroughly formed financial analysis report gives the knowledge to take a practical decision.
It also helps the company’s management in acquiring and managing funds. So what does it mean? It allocates the funds. And it provides insight into making critical financial decisions & cut down financial costs.
So, who can look up financial statement analysis?
Investors, market analysts, creditors & company’s management evaluate the analysis.
Reasons why Errors Occur in Financial Statements?
Accounting errors occur even if you’re using AI or cloud-based accounting systems. If you can identify the mistakes, it is most likely that you will get to resolve them quickly.
Common Accounting Error
So, here is the list of accounting mistakes that lead to errors in financial reporting:
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Data Entry Error
Usually, data entry errors lead to other errors. But, mainly, they occur due to the following:
- Entering items in the wrong account.
- Transposing numbers.
- Leaving out or adding a digit or a decimal place.
- Omitting or duplicating an entry.
- Treating expenses as income or vice versa.
So, these common bookkeeping mistakes can lead to inaccurate financial statements.
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Error of Commission
An error of commission is the technical term for an accounting error due to the wrong general ledger account number.
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Error of Omission
When you neglect to record a transaction, it is called an Error of Omission. The misconceptions occur due to unreported expenses and inventory quantities.
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Error in Accounting Principle
It may occur when you record a purchase as an expense rather than an asset. Keep a clear difference between liabilities and assets.
- Incompetent Staff
i) Inadequately Trained Staff
Incompetent staff causes accounting errors, for example, miscounting or reporting wrong expenses. Both of these errors cause common accounting errors. Well, accounting errors generally occur when your accounting staff is not up-to-date. We know that the guidelines for accounting standard and regulatory requirement continually changes
II) Error due to Manual Process
Moreover, if your accounting staff is conducting all the tasks manually, errors can also occur. For example, mistakes such as transposing digits, misplacing a decimal point, and other blunders get reported while manually processing the data.
III) Vague Communication
Unclear communication can cause a significant loss to the company. Want to know how? If unclear communication is conducted between the policy maker and the one who is going to implement it, it may eventually create an error in accounting.
IV) Poorly Integrated System
The company’s cash management should have a manual intervention regularly. If the financial account conducts an adequate review process, it may lead to data havoc resulting in errors.
How to Correct the Errors in Financial Statements?
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Identify the Error
Identify the error first to correct any error. Determine whether it is due to a cloud accounting system or an inefficient manual process. For identification, you must have updated knowledge about accounting standards (GAAP). Check the financial statement to determine whether there is a misuse or neglect of regulatory requirements. Then, correctly classify the adjusting journal entries. You may identify the error via
- Check the data gaps & inconsistencies in the financial reports.
- Insufficient cash flow forecasting reveals potential shortfall.
- Procedural Inefficiencies lead to the error of omission and inconsistencies.
- Reviewing the trial balance is one of the ways to identify the error.
- And if there are still some errors left, go for reviewing reconciliation. Most of them will be caught in this.
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Calculate the Materiality of the Error
Quickly adjust the physical count of inventory after an inventory discrepancy is spotted. First, statistically analyse the quantitative and qualitative effects. Then, adjust the opening balance sheet accordingly.
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Report for Correction
The standard method for reporting is usually indicated with a big R or small r, depending on the intensity of the mistake. Then, adjust the financial statement to reflect the error correction.
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Automated Accounting Program Solution
Manual processes lead to human error, which automated AP solutions can eliminate. Automation removes the most obvious errors, having complete visibility of key performance. It has also made it easy to review and enforce the best practices.
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Highly Trained Accounting Staff
With skilled and up-to-date accounting staff, your company will have a smoother path to internal and external financial reporting, forecasting and planning. Moreover, a well-trained financial accountant would choose a streamline and optimise the procedures with automation instead of struggling to catch up
Routine check to identify the error
