6 Common Mistakes in Making Financial Statements

Common Mistakes that Businesses Make in Financial Statements

     Financial reports are one of the most important tools in business. Without financial reports, you will not know how far the business development is being carried out.

With financial reports, you can adopt the right business strategy to support the company's development.

However, sometimes errors occur in preparing financial statements.

These mistakes must be avoided so that the resulting financial reports are accurate.

Do not let you enter the wrong data in the financial reports which can be fatal to the company.

Here's a list of some of the common mistakes entrepreneurs make while maintaining their financial accounts. The effect of errors on financial statements can be disastrous and hence, every entrepreneur should be aware of the common errors made on financial reports.

Mistake in Classification of Assets and Liabilities

Your balance sheet is the most important statement because it tells you the state of your company's finances. Even though you may have studied balance sheets many times, the classification of assets and liabilities can be very confusing. You need to know how much you have to pay, and how much you have to accept from your client.

Therefore, classifying your assets and liabilities in the right manner is a top priority.

Mistake in Income & Expenditure Statements

Income and expense reports are basically made to calculate the cost of goods sold. A miscalculation or misleading number can affect cost of goods sold, gross profit, and net income, in a big way.

In addition, it is important to keep income and expenditure reports up-to-date. Any errors in this sheet can directly affect your company's income statement, leading to understating or overstating income statement.

Not Reconciliating Loan Accounts

Bank accounts and credit cards aren't the only accounts you will need to reconcile. You also have to reconcile your loan account each time you receive your loan statement.

Reconciling your loan account is the easiest way to ensure that the liabilities portion of your balance sheet is accurate. This also ensures that you record the interest portion of your loan payments correctly. Too often, all loan payments are posted against the principal balance on your books, which means your liability and interest charges will be understated. (nerdwallet.com)

As with your bank reconciliation, make a note on your calendar to ensure your loan accounts are reconciled regularly. You should reconcile your loan accounts before filing your tax return each year.

Mistake in Data Entry and Omissions

Data entry errors occur when data is entered incorrectly into the financial database from a financial document. These errors occur when there is human error in the books. For example, a number written backwards like 27 is written as 72. This is a basic human error and therefore, you need to double check to avoid such mistakes.

Error of omission refers to an entry that was not recorded by the accountant, this can occur when there are many transactions and the accountant may forget to enter one or two of them. This is a basic human error, and double-checking should be done to avoid it.

Mistakes in Cash Flow Statements

Some of the common cash flow errors are overstating operating cash flow, gross non-cash settlements, netting off transactions, errors with foreign currencies, and errors in determining what is "cash" or "cash equivalents". Financial consultants stress that the cash flow statement information is 100% accurate, as investors stress it before making any business decisions.

Errors in Inventory

It's important to have an estimate of the inventory in your warehouse, as well as inventory that is in transit.

In some cases, you may be dealing with multiple types of inventory, and may have to decide how much inventory you'll need in the future.

One common mistake is to re-record every sales return, in which the inventory has been returned and is now back in your warehouse again. In fact, if you have lots of different inventories, then it's hard for you to keep track of them. It is strongly recommended to hire an accountant who will do a better job.

The effect of an error on financial statements can seriously affect your books. You ended up taking the wrong decision. Therefore, take the time and ensure that your books are balanced, so that the future of your company is safe and secure.