Having a record of your daily transactions is essential for your business. However, maintaining your financial records is not an easy task. You can do it yourself but there are chances of making certain mistakes which may cost your business. We have listed some common errors that entrepreneurs make while maintaining their financial accounts. The effects of errors on financial statement can be costly and hence, every businessman should be aware of the common errors that are made on financial statements.
1) Errors in Classification of Assets and Liabilities
Your balance sheet is the most important statement as it tells you the financial condition of your company. Although you might have studied the balance sheet over and over again, classification of assets and liabilities can be quite confusing. You need to know how much amount you are liable to pay and how much amount you should receive from your clients. Hence, classifying your assets and liabilities in the right way is of utmost priority.
2) Errors in Income & Expenditure Statement
Income and expenditure statement basically is made to calculate the cost of goods sold. A miscalculation or misleading figure may massively affect the cost of goods sold, net income, and gross profit. Furthermore, it is important to maintain the income and expenditure statement up-to-date. Any error in this sheet may directly affect your profit and loss statements, leading to understating or overstating of profit or loss.
3) Errors in Cash Flow Statement
Some common errors in cash flow are overstating operating cash flow, grossing up non-cash settlements, netting off transactions, errors with foreign currency, and errors in determining what is “cash” or “cash equivalent”. Financial consultants emphasize that the cash flow statement information is 100% accurate because the investors place emphasis on it before making any business decisions.
4) Data Entry Errors and Errors of Omission
Data entry errors occur when the data is incorrectly entered in the financial database from the financial documents. These errors occur when there are mathematical human errors in the books of accounts. For example, numbers may be reversed by mistake such as 27 may be written as 72. This is a basic human error and hence, you need to cross check to avoid such mistakes.
The error of omission refers to the entry not being recorded by the accountant, this may happen when there are a lot of transactions and the accountant may forget to feed in one or two of them. These are two basic human errors and double checking has to be done to avoid them.
5) Errors in Inventory
It is important to have an estimate of the inventory in your warehouse as well as the inventory which is in transit. In some cases, you may be dealing with different types of inventory and may have to decide how much inventory you require in the future. One of the common errors is to re-record any sales return, that is the inventory has been returned and is now back in your warehouse again. In fact, if you have many different inventories, then it becomes difficult for you to keep a track of them. It is strongly recommended to hire an accountant who will do a much better job instead.
The effects of errors on financial statements can affect your books of accounts severely. You can end up taking wrong decisions. Hence, take time and make sure your books are balanced so that the future of your company is safe and secure.